Preamble

The House met at half-past Two o'clock

PRAYERS

[MADAM SPEAKER in the Chair]

PRIVATE BUSINESS

CITY OF LONDON (WARD ELECTIONS) BILL (BY ORDER)

Order for further consideration, as amended, read.

To be further considered on Wednesday 10 May.

Oral Answers to Questions — INTERNATIONAL DEVELOPMENT

The Secretary of State was asked—

Kosovo

Dr. Norman A. Godman: When she last discussed with her colleagues from other member states of the European Union matters relating to the funding of training programmes designed to equip individuals and political parties in Kosovo to create local administrations and prepare for self-government for the province. [119351]

The Parliamentary Under-Secretary of State for International Development (Mr. George Foulkes): The support that we are providing to Kosovo is principally directed at the development of capacity to enable Kosovars to run their own administration. We are providing support for the establishment of Radio Television Kosovo as an impartial public broadcasting service, for civic and voter education and for the training of election officials. The European Union has committed 360 million euros this year, focused on energy, water supply, housing and transport. The United Kingdom's share is 61.2 million euros, which is the equivalent of £35.5 million at today's exchange rates.

Dr. Godman: I compliment my hon. Friend and his officials on the work that they are carrying out in Kosovo. However, there are conflicting views there on whether a Kosovo-wide election for an assembly should come before local elections. It would make good sense to hold local elections in the near future. Funding will be necessary, but at the heart of the setting up of such elections must be a guarantee of protection for minority groups throughout the province.

Mr. Foulkes: I understand that there may be different views about the timing of elections. We are prepared to provide support for the administration of the election and

I am pleased to tell my hon. Friend that the Westminster Foundation has also provided support to the political parties in Kosovo. We hope that there will be free and fair elections at all levels.

Madam Speaker: I call Mr. Pa—?

Mr. Michael Fabricant: Fabricant. Ominous! That was very off-putting.
Will the Minister join me in praising the work of the British Council in Kosovo and, indeed, elsewhere? Is he aware that although extra Government funds were made available to the British Council for education and training, those expired in March 2000? So far, no extra moneys have been allocated. Will the hon. Gentleman have an urgent meeting with the Foreign and Commonwealth Office and the Treasury to ensure that moneys are made available so that the British Council can carry on with its excellent work?

Mr. Foulkes: I understand why the hon. Gentleman was disconcerted. Perhaps Madam Speaker does not regularly read The Guardian sketch.

Mr. Fabricant: The writer is not in the Press Gallery.

Mr. Foulkes: That means that I will not be in it, oh dear.
We value the work that the British Council is undertaking here and elsewhere. The central core funding of the council is provided by the Foreign and Commonwealth Office and it is open for the council to compete with other organisations for the sort of work that we provide. It has been successful in a number of those bids. I would be happy to talk to Baroness Scotland about the role of the British Council in Kosovo, as the hon. Gentleman requests.

Sri Lanka

Mr. Simon Hughes: What are her Department's priorities in Sri Lanka for the financial year 2000–01. [119352]

The Secretary of State for International Development (Clare Short): Finding a lasting solution to the long-running conflict is the major priority in reducing poverty in Sri Lanka. Our country strategy was published in September 1999. I will be happy to send the hon. Gentleman a copy. It commits us to a small programme focused on improving the quality of education, particularly at primary level, which is deteriorating I am afraid; improving the livelihood security of the very poor in conflict areas; and working for inter-communal reconciliation.

Mr. Hughes: I am grateful for that answer. The Secretary of State will know that civil war is rapidly escalating, causing injury and death in Sri Lanka. In the light of that, will she consider providing further cross-Government, co-ordinated help with medicines, gaining access to people in war-torn areas and protecting civilians, many of whom are now trapped? Is there any possibility of an initiative by the British Government, together with others in the Commonwealth, to reduce the


conflict and get the two sides to back off, so that we can achieve some of the reconciliation and settlement that the right hon. Lady wants as much as we do? Will she give an absolute undertaking on behalf of the Government that none of the arms that we have sold will be used to repress or attack civilians in Sri Lanka?

Clare Short: I agree with the hon. Gentleman. The long-running conflict is a disaster for the people of Sri Lanka and it has escalated recently, which is worrying. We are trying to provide help and support for the poor who are affected by the conflict. That work will continue and we remain committed always to providing humanitarian relief where it is needed and where we can. Sometimes that is difficult where there is conflict.
The hon. Gentleman will know that the Norwegian Government are involved in an initiative to broker talks—it is not looking optimistic at the moment. The United Kingdom Government have made it clear that they will be more than willing to help, if both sides want that. We will only be useful in that way.
On the hon. Gentleman's third question on arms, I am sure that the answer is yes, but I cannot say that with authority. I will check and write to him.

Mr. Dafydd Wigley: Does the Secretary of State accept that a long-term solution in Sri Lanka can be secured only when the legitimate rights of all peoples there are respected? In any dealings with the Government in Sri Lanka, will she emphasise the need to ensure fair play for the Tamil peoples as part of their policy? Without that, there will not be long-term stability.

Clare Short: I certainly agree with the right hon. Gentleman that peace always requires justice for all people, but I am afraid that, whatever the historical origins of the conflict, continuing fighting by the Tigers is bringing enormous suffering to all the people of Sri Lanka. It is time for peace.
The right hon. Member for Upper Bann (Mr. Trimble) may be interested to know that we have set up links between schools in Sri Lanka and in Northern Ireland to try to learn from some of the reconciliation work in Northern Ireland, so that such matters can be included in the curriculum in Sri Lanka. All the people need peace—of course, with justice, but the conflict should be brought to an end.

Debt Relief

Mr. Malcolm Savidge: What progress was made on speeding up debt relief for heavily indebted poor countries at the spring meetings of the World Bank and the International Monetary Fund. [119353]

The Secretary of State for International Development (Clare Short): At the spring meeting of the World Bank and the International Monetary Fund, agreement was reached to establish a joint World Bank-IMF committee to oversee the implementation of the enhanced heavily indebted poor countries initiative. The Chancellor and I have pressed for that, and hope that it will provide a focus for efforts to ensure that commitments made at the Cologne

G7 meeting—that three quarters of eligible countries would start to receive debt relief before the end of the year—are met. It looks as though that target is slipping.

Mr. Savidge: Do the current World Bank and IMF estimates of the number of countries that will qualify for enhanced debt relief look as though they will reach the G7 target of three quarters, to which the Secretary of State referred?

Clare Short: I am grateful to my hon. Friend for that question. I did not attend the meeting, because my voice—which is still croaky—collapsed completely when I was meant to be in Washington. I am sad to say that the communiqué the Development Committee stated that it was hoped that at least 20 eligible countries would start to receive debt relief before the end of the year. That is a reduction in the number in the Cologne commitment. All those who are concerned about debt relief—a concern shared widely throughout our society and across the world—should exert pressure to speed up the process. We are doing that as a Government, but other Governments are causing delays; that is a big worry.

Mr. William Cash (Stone): Would the Secretary of State be good enough to tell us which countries are responsible for the delay? Does she accept that members of the Jubilee 2000 all-party group are extremely concerned about the situation? I pay tribute to her for the honesty with which she has just expressed herself on the subject—she, too, is obviously deeply concerned. How much debt has been paid off? What steps are being taken to liaise with the proposed summit on the matter which the Pope is organising towards the end of this year?

Clare Short: I do not think that it would be wise for me to name countries that are causing delays. We need to exert that beautiful pressure that comes from civil society throughout the world on all the countries involved so that we can move forward. I ask the hon. Gentleman and all those involved in campaigning to do that. In the United States of America, there has been difficulty in obtaining the support of Congress for commitment to the multilateral debt fund. I know that the Administration are trying to get that support and that they would be grateful for any help to achieve that.
So far, five countries are on track with enhanced debt relief. Uganda has gone through the process completely. The amount of debt relief on offer is $100 billion of the $145 billion that is owed. That is a considerable sum.
I am aware that the Pope is holding a conference; that can only be good. I hope that it will contribute to keeping people to the commitments made at Cologne.

Mr. Andrew Reed: Although it is important that we have made progress on this issue, there obviously remains much work to be done. I urge the Secretary of State to give us at least a hint as to which countries are holding matters up, so that those of us who are involved with the Jubilee 2000 coalition can encourage others around the world to apply pressure on their own Governments, if they are holding things up.


There is a feeling of real frustration that we have come so far, but have not yet delivered a real change for people in the third world.

Clare Short: I am grateful to my hon. Friend for his offer of support. It would be invidious to have a list of guilty parties. Not many major countries were involved in the G7 meeting at Cologne. We are about to go to Okinawa. Pressure on all to speed up the process and to keep to their commitments should be exerted across the international system. The new unit in the bank and the fund gives us an opportunity to put the pressure on, which is important. One of the great achievements is the decision that debt relief should go behind poverty reduction strategies. Some countries are calling for absolute perfection in those strategies. We are saying that we should put broad poverty reduction strategies in place, so that initial debt relief can flow and then be strengthened as time goes on. That is the right way forward.

Mr. Gary Streeter: I know that the Secretary of State will be as disappointed as many of us are at the lack of progress in this special year, the year of Jubilee, when we want to make unique progress on debt relief. I know that she will share the concern of Kofi Annan, who said in March:
The deeper, faster and broader relief promised last year has yet to materialise.
I know that the right hon. Lady is working hard on this matter and will be disappointed, but, apart from the joint implementation committee, what specific plans does she have to break through the current logjam?

Clare Short: I am sorry to disagree, as usual, with the hon. Gentleman. There has not been a lack of progress. The most stupendous achievement has been made, primarily by the Church and faith groups across the world and by other parts of civil society, in pressing the leadership of the richest countries in the world to agree more generous debt relief to mark the year 2000. The enhanced heavily indebted poor countries initiative and the decision to put the focus on poverty reduction strategies are considerable achievements. Five countries are already on track and one has completed the process. So that is all good, and it is considerable progress.
We are seeing some slippage in the number of countries coming through against the target set at Cologne of three-quarters of eligible countries on track by the end of 2000. I think that the situation is retrievable. With enough pressure, countries will get back on track, and that must be our shared objective.

Mr. Streeter: I know that the Secretary of State is working hard on the matter, but I am sure that she will agree that the granting of debt relief to only five countries after all these years and after four months of the year 2000 is not a significant achievement. May I put a practical suggestion to her? Between now and the G8 summit in Japan in July, will she make debt relief her highest priority? Will she engage in a round of shuttle diplomacy with her counterparts in G8 countries, the IMF and the World Bank? Will she put every last ounce of effort into

the project between now and July so that, for all those living under the crippling burden of unpayable debt, the year 2000 really will be a year of delivery?

Clare Short: I am grateful for the hon. Gentleman's concern, but he is wrong to suggest that, only this far into the year, to have five countries on track for the much more generous debt relief that has been agreed as a result of the international campaign is a disaster. It will be a disaster if we do not get three quarters of eligible countries through by the end of the year. Pressure from him and all of us, including me, could achieve that objective. I certainly promise him that I and my right hon. Friend the Chancellor will continue to exert all the pressure that we can. I am not in favour of shuttling around the world, as some politicians do, for its own sake, but I promise that I shall do everything in my power, as will my right hon. Friend the Chancellor. I hope that with the help of the hon. Gentleman and all hon. Members, we shall make sure that we keep to the Cologne commitment.

Kosovo

Mr. Roger Casale: What assessment she has made of the impact of her Department's work in Kosovo. [119354]

The Parliamentary Under-Secretary of State for International Development (Mr. George Foulkes): We have recently reviewed our work in Kosovo, Albania and Macedonia. Our contribution last year totalled £110 million. As well as assisting refugees returning to Kosovo, we have supported the United Nations mission, mine action, human rights, health care and restoring basic services. We believe that our work has made a significant contribution to the process of getting life in the province back to normal after the conflict.

Mr. Casale: I thank my hon. Friend for that reply. I visited Kosovo last year with Mr. Geoffrey Morris, on behalf of London and South East Direct Aid to Kosovo, and saw at first hand the excellent work of the Department. I am a patron of LASEDAK and we work alongside the Scottish Charities Kosovo Appeal on humanitarian relief and development projects in Kosovo. Is my hon. Friend aware of the concerns of such organisations about the relative scaling back of the work of his Department within the overall framework of the EU stability pact? Non-governmental and voluntary organisations working in Kosovo depend very much for their effectiveness on the work of the Department and, with 10,000 refugees returning to the region, in which LASEDAK and SCKA are involved, there is a real danger that next winter will be worse than last.

Mr. Foulkes: I am grateful to my hon. Friend for the kind things that he said about my Department's work. The main burden of reconstruction should now rightly be taken on by the European Union and the new agency for reconstruction, which started its work at the end of February. As I said earlier, 360 million euros has been provided through the European Union and our contribution is £35.5 million. However, we are anxious to make sure that the operation is not hampered by Brussels bureaucracy. We want resident advisers and devolved


responsibility to make the operation effective and to ensure that there is quick and effective reconstruction in Kosovo.

Mrs. Cheryl Gillan: Has the hon. Gentleman had a chance to study the United Nations Economic Commission report that was published today? It slams the aid efforts in the Balkans, saying that the big gap between funding pledges and disbursements delayed action and created disillusionment. The report also highlights poor co-ordination, the lack of coherent vision and the failure to place individual projects within a broader programme of development at national and regional level.
Can the hon. Gentleman assure us that all the promised UK funds have been disbursed and that he is making every effort to ensure that the civil administration posts in Kosovo, some 55 per cent. of which remain empty, are filled by local people? Does he agree that, while more than half those posts are vacant, the region will continue to be run by western non-governmental organisations? Despite their best efforts, they could repeat the mistakes made in eastern Europe and remain open to the criticisms made in the report.

Mr. Foulkes: The picture described by the hon. Lady is a travesty of reality. The Kosovo crisis saw the largest and fastest movement of population in Europe since world war two. The international community managed to get people under shelter in the winter, with heat, light and water, in spite of the dire predictions. The £110 million that we have provided is the largest humanitarian programme that DFID has ever undertaken, and 90 per cent. of operational targets were achieved on schedule and within budgeted costs. That is a great achievement, and the hon. Lady should recognise that.

Arms Exports

Dr. Vincent Cable: What evaluation she has carried out of the impact of export credit guarantees on arms exports to developing countries. [119355]

The Secretary of State for International Development (Clare Short): My Department commissioned a review by Dr. Valpy Fitzgerald of Queen Elizabeth house, which found that export credit guarantees could promote sustainable development in poor countries, but expressed reservations about the appropriateness of ECGD support for arms exports to developing countries. The position paper of my Department to the ECGD review argues that we should be willing to support arms expenditure when it is part of a responsible and properly accountable security sector that is needed to create the stability necessary for development—but only then. Copies of the review and the position paper have been deposited in the Library. I am grateful to the hon. Gentleman for drawing attention to them.

Dr. Cable: Is the right hon. Lady aware of the work of the Select Committee on Defence, which suggested that up to £250 million a year of taxpayers' money is provided in the form of subsidy for arms exports to developing countries through the ECGD? Does she regard that as a

useful additional flow of finance, or does she agree with the retiring director of the IMF that it seriously undermines development?

Clare Short: I agree that excessive arms expenditure undermines development, but countries need stability. When there is an over-bloated security sector or no order and peace, one cannot achieve development. Therefore, a properly sized and democratically accountable security sector is what developing countries need. There have been no ECGD-backed arms exports to HIPC countries or to countries eligible under the International Development Agency, the most concessional arm of the World Bank, in recent years and 80 per cent. of the ECGD cover for arms expenditure in developing countries goes to Saudi Arabia and Oman. We have improved the record, but the hon. Gentleman raises an important point. I hope that more hon. Members will take an interest in the review of ECGD, because we could tighten up and improve it.

Mr. Desmond Browne: Does my right hon. Friend agree that the conflict in many developing countries is exacerbated by the activities of arms brokers, who ply their trade from the United Kingdom, largely in an unregulated fashion? Indeed, there is evidence to suggest that, dealing through Uganda, arms brokers from this country are providing arms to both sides of the conflict in the Congo. In the context of the Government's review, will my right hon. Friend ensure that the voice of those who wish to see such activity licensed in this country is heard loud and clear?

Clare Short: My hon. Friend raises an extremely important point. There have been worrying examples of arms brokers based in the United Kingdom brokering deals with disreputable sources for countries that do not need more arms. As I think my hon. Friend knows, the issue is under review. Unfortunately, I am not in a position to make an announcement this afternoon.

Mr. John Wilkinson: Do the Government take pride in their banning of ECGD credits for arms acquisitions by 63 of the poorest countries in the world? Of those countries, only Kenya has been a recipient of such credits over the past 13 years. Would it not be a much more ethical foreign policy for the Government forthwith to ban all exports of British armaments to Zimbabwe, which is using them in a civil war in the Congo?

Clare Short: As the hon. Gentleman knows, my right hon. Friend the Foreign Secretary will make a statement on Zimbabwe later this afternoon. He will probably have something to say of interest to the hon. Gentleman.
I take considerable pride in the fact that the Government have tightened up considerably on the previous Government's record. None of the 63 poorest countries is in receipt of ECGD cover, including Kenya. It did not get any such cover for arms purchases. We have declared that there will not be such cover in future. We are trying to get international agreements so that others will take up our position. I think that that is right, and I hope that the hon. Gentleman will support the campaign.

World Education Forum

Mr. Bill Michie: What progress was made at the world education forum in Dakar on putting in place policies to deliver high-quality primary education for all children? [119356]

The Secretary of State for International Development (Clare Short): The Dakar forum resulted in a strong political commitment by national governments and the international community for education for all and the development of national action plans, and agreement on the need for significantly enhanced investment by governments and donors for primary education. United Nations conferences cannot require sovereign Governments to prioritise primary education, but can encourage and monitor progress. I am confident that developing country Governments are now aware that educating a generation of children even to primary level, including girls, is the most effective development intervention that a country can make. I hope that we will be able to drive this commitment forward.

Mr. Michie: I thank my right hon. Friend for that full and frank reply. In terms of her Department, what are the implications of the Dakar forum for the future? What steps does she think may be necessary to ensure that Governments of developing countries and donors fulfil the commitments that they made at Dakar, so that all children have the right to primary education?

Clare Short: My hon. Friend will probably know that the bulk of the spending on education by most developing countries is directed to higher education. The reason is that elites are powerful in very poor countries. They live in the cities and they can usually pre-empt expenditure. It is a difficult political task to get a commitment to spending on the poorest children in rural areas.
We are working hard on this task through the international system and by contributing more funds. We have committed £300 million over the past three years. The call at Dakar for a special international fund will not do the job—we must persuade Governments and their civil societies to prioritise the education of poor children. We are making progress and there must be sustained interest in doing so through to 2015.

Mr. Andrew Rowe: Does the Secretary of State share my anxiety that in certain countries in sub-Saharan Africa primary education has become susceptible to charging for various elements of it, whether it be books, uniforms or whatever? This is proving a disincentive to families. Did the Dakar forum address that issue?

Clare Short: The hon. Gentleman is absolutely right. Kenya, for example, is a big spender on education, but 98 per cent. of its expenditure goes on teachers, and there is nothing for books, chalk or anything else, so parents are charged and poor children do not go to school. That distortion applies throughout the system, which is why a special top-up fund will not do. It is important to get Governments committed to educating all children, including poor children—and particularly girls, who tend to be excluded. As the hon. Gentleman knows, countries

such as Uganda and Malawi, which is very poor, are giving a lead, and we must spread that commitment internationally.
The World Bank's evidence is clear: educating a generation of children, including the girls, even only to primary level, is the strongest development intervention that any country can make. If countries want development, they must educate all their children.

Oral Answers to Questions — PRIME MINISTER

The Prime Minister was asked—

Engagements

Ql. [119380] Sir Raymond Whitney: If he will list his official engagements for Wednesday 3 May.

The Prime Minister (Mr. Tony Blair): This morning, I met Nelson Mandela, as well as having meetings with ministerial colleagues and others. In addition to my duties in the House, I shall be having further meetings later today.

Sir Raymond Whitney: Does the Prime Minister accept that it is not enough for the international community to sit back until elections are held in Zimbabwe? If the present scale of killings and intimidation of political parties continues, the results of any such elections will be meaningless. Will the Government now do more, in collaboration with our international partners, to seek to restore the rule of law in Zimbabwe?

The Prime Minister: I entirely agree that the situation in Zimbabwe is very serious, but the hon. Gentleman will have seen yesterday's statement by the Commonwealth ministerial action group, which made it clear that the elections should be free and fair and that the violence and killing must stop. He will also know from the negotiations that took place in this country last week that we have made it clear, as we have done throughout the situation, that we are prepared to help, but only if the violence and illegal occupations cease.
It is necessary not only for the international community but for this country in particular to make that absolutely clear, and we have done so. We are working at every single level of the international community to get that point across, and we will carry on doing so.

Mr. Richard Burden: My right hon. Friend will know that one of the meetings that he held this morning was with a delegation of stewards from the Longbridge plant in Birmingham. Is he aware of the strength of their feeling about safeguarding both the future of that plant and the future of car manufacturing in Birmingham? Will he comment on the fact that sales of Rovers have risen dramatically in the past two months and that the company's market share is now 12 per cent? Will he do all that he can to safeguard the future of


the plant, including providing tangible support for a credible business plan, so that we can retain the industry, which is strategically important for the west midlands?

The Prime Minister: My hon. Friend is absolutely right, and the Rover is a good car, as sales show. It is essential that we put together a plan that will give Longbridge a viable future; that we safeguard as many jobs as possible, and that for those people who unfortunately lose their job we stand ready to help them through the process of change. I made it clear to the people from Longbridge whom I saw this morning that the Government stand willing to do whatever we can to safeguard the existing jobs and to make sure that anyone who does lose their job gets the best possible chance of a decent job in the future. We shall carry on, as we have been doing over the past few weeks, working night and day to bring about that solution.

Mr. William Hague: Last year, vandals rioted in the City, destroying property and terrifying law-abiding people. On Monday, the same groups defaced the Cenotaph and dishonoured our war dead. The Prime Minister has said that such events cannot happen again, so will he now abandon the Government's wretched weakness on law and order? Will he support the call of mayoral candidate Steve Norris to do all in his power to see that annual display of violence banned for next year?

The Prime Minister: As the Home Secretary indicated yesterday, and as I have said, of course we shall do everything possible to ensure that those appalling, disgraceful scenes do not happen again. I have to say to the right hon. Gentleman that his capacity to exploit any situation is absolutely unlimited. As for his mayoral candidate, I read his Evening Standard advertisement today, and there was one word missing, and its first three letters are "con".

Mr. Hague: The right hon. Gentleman talks about exploiting the situation, but he is the one who went down to the Cenotaph yesterday, peeled an onion, and said, "It can never happen again." We want to know what he is going to do to make sure that it never happens again. After last year's events, the Home Secretary said that the Government would do everything possible to prevent a repetition; now, the Prime Minister says that it cannot happen again—but it has already happened twice. The violence of that demonstration was widely predicted and advertised; my right hon. Friend the shadow Home Secretary wrote to the Home Secretary about it. Why not say now that it should be banned next year?

The Prime Minister: First of all, it is unfortunately not the first time that riots have occurred in London: some people remember a few in the 1980s and 1990s. Of course, we have to sit down sensibly with the police and other authorities to make sure that those disgraceful scenes do not happen again. That we shall do. Nothing is helped by the right hon. Gentleman, as ever, leaping on any passing bandwagon.

Mr. Hague: We remember the 1980s, when the right hon. Gentleman was parading around with a CND badge—he knows all about what happened in the 1980s.

Do not these events require a change from utter weakness on law and order? Is he not soft on crime and soft on the causes of crime? What sort of signal does it send to rioters that he has released early more than 700 people convicted of violent disorder or affray, when the Home Secretary promised not to release serious offenders? Is it not time that we stopped releasing thugs before their sentences have been served?

The Prime Minister: On the last point, I would cite the unanimous support of the all-party Home Affairs Committee, which at the time included the person who is now the Conservatives' Front-Bench spokesman on law and order. The fact is that it is the Labour Government who have introduced "three strikes and you're out" for burglars and toughened up the youth justice system; it is we who have put more money into law and order, when the right hon. Gentleman was pledged to cut the money going into law and order.

Mr. Hague: At the time that that Committee expressed support for the policy, the Home Secretary said:
We have no plans…whatever…to facilitate the early release of serious or sexual offenders…none whatever.—[Official Report, 29 November 1999; Vol. 340, c. 27.]
Since that time, they have released early 19 sex offenders, 22 people convicted of cruelty to children and 2,500 convicted drug dealers. By releasing criminals early, preventing tougher sentencing and cutting police numbers, are not the Government weakening the fight against crime, and is that not a total betrayal of everything the Prime Minister promised the country?

The Prime Minister: The fact is that, under the Tories, crime doubled—they never like to be reminded of it, but crime doubled. Under the Labour Government, crime has fallen. It is this Government who have introduced the measures on burglary and youth justice. What contribution did the right hon. Gentleman make to tougher sentencing the other day? He has now said that he rules out a mandatory life sentence for murder. Am I right, or am I wrong?

Mr. Hague: For self-defence, as the Prime Minister knows full well.
To fight crime and prevent future riots, would it not be a good start to elect tomorrow a mayor of London who will be on the side of the police, rather than on the side of the rioters? Since the right hon. Gentleman has now tried every other means of preventing the hon. Member for Brent, East (Mr. Livingstone) from becoming mayor of London, will he now join all his friends and supporters on The Mirror in saying, "Vote Conservative tomorrow"?

The Prime Minister: Some of us recall the shadow Home Secretary talking about the riots yesterday. Whom did the right hon. Lady decide to attack? She attacked the police. We should support the police in this situation. We will take no lessons on law and order from the Conservative party, which doubled crime and, when the right hon. Gentleman was in the Cabinet, cut police numbers as well.

Caroline Flint: Is my right hon. Friend aware that, as we sit in this Chamber, there is a count in the Conisbrough ward in my constituency, where there


has been a full postal ballot as part of our pilot scheme to modernise the way in which people vote? I am pleased to tell my right hon. Friend that we are looking at a 45 per cent. turnout. Will he extend his congratulations to the person who I know will be re-elected: Councillor Gerard McLister?

The Prime Minister: I hope that my hon. Friend is right in her predictions. The point that she makes is serious. It is important that we raise the numbers of people participating in local democracy. Early results indicate that the experiment is well worth pursuing. We shall obviously have to evaluate results carefully, but if we get 10 or 15 per cent. higher turnouts as a result of the new system, it will be one reform that will hugely strengthen the whole of our democracy.

Mr. Charles Kennedy: In condemning utterly the evil thuggery that we all witnessed in central London two days ago, may I turn the Prime Minister's attention to another form of evil in our society: the evil of racism? Does he agree that the appalling attack on the black care worker in Birmingham two days ago—he was racially abused and then set on fire—should act as an important pointer to every politician in this House that we should not conduct ourselves in a way that plays or panders to the worst fears of racial prejudice?

The Prime Minister: I agree with every word that the right hon. Gentleman has said.

Mr. Kennedy: Does the Prime Minister further agree that, when one is talking about issues such as asylum and immigration, particularly with elections approaching, to use saloon-bar language is nothing more than gutter politics?

The Prime Minister: The right hon. Member for Richmond, Yorks (Mr. Hague) may laugh, but it is extraordinary that he has not from the Dispatch Box put the positions that he has been putting in the country. The reason that he does not do so is that he knows perfectly well that his arguments would not stand up in proper debate.
Let me make one point. Asylum, and the growth in the number of asylum seekers is an issue, and we are trying to deal with that issue. However, one thing is a cruel deception: to go around the country telling people that all the problems of the health service and schools and old-age pensioners could be solved if only we locked up a few asylum seekers.
Let me give the House the facts. The total cost of asylum is less than one fifth of 1 per cent. of Government spending. It is a problem, we are dealing with it, but we should not, any of us, exploit it—particularly not someone whose desperation is rather greater than his judgment.

Mr. James Plaskitt: Three thousand pensioners in my constituency qualify for the minimum income guarantee. For a single pensioner, that means £16 a week—a 25 per cent. cash increase—more

than they were receiving at the general election. What can the Government do to ensure that those who qualify for the minimum income guarantee get it?

The Prime Minister: We are trying to ensure that people who are entitled to the minimum income guarantee get it. Altogether, this Government will put in some £6.5 billion additional expenditure for pensioners. There is of course now the £150 winter fuel allowance and free eye tests and free television licences for those aged over 75.
It was also very important that we dealt with the problems of the poorest pensioners first. That is what the minimum income guarantee does. For some couples, it will mean gains of up to £20 a week. I am proud that a Labour Government are tackling the issue of pensioner poverty. Pensioners—any of them—should not forget that the Conservative party would take those things off them again.

Mr. Desmond Swayne: The right hon. Member for Holborn and St. Pancras (Mr. Dobson) has said that he does not know how to cast his second preference vote in the election for which he is the Labour candidate. This morning on the "Today" programme, the Secretary of State for Education and Employment announced that it was no good asking him how he would do so because he was opposed to the very electoral system. As that electoral system was designed by the Prime Minister, perhaps he would give us his advice on how he will cast his second preference vote.

The Prime Minister: No.

Mr. Eric Clarke: My right hon. Friend the Prime Minister should be thanked—[Interruption.]

Madam Speaker: Order. Let the hon. Gentleman finish.

Mr. Clarke: I thank my right hon. Friend on behalf of the miners who suffer from emphysema, bronchitis and white finger, but one group of people in the coalfields has been left out: the sacked miners, who suffered injustice, according to the inquiry conducted by the Select Committee on Education and Employment. May I suggest as a start the reinstatement of those miners to the miners pension scheme for them and their families?

The Prime Minister: As my hon. Friend knows, the Department of Trade and Industry has undertaken a review of what happened with regard to dismissals and re-employment around the time of the 1984–85 miners strike, and will shortly announce its findings. I hope that those in the mining industry recognise that we have given support to the mining industry, most particularly for those people who suffered as a result of working down the pit. After years and years during which people fought and were not able to gain compensation, it is this Government who have come up with the compensation scheme. It is


taking time to push that through, but we are pushing it through, and I hope that over the next couple of years, people will see the benefits.

Mr. Christopher Gill: Doubtless, the Chancellor of the Exchequer will have told the Prime Minister that more than half the Bank of England's gold and currency reserves are now held in euros. Will the Prime Minister take this opportunity of telling the House by how much the value of the nation's reserves has slumped since the decision was taken to sell off the nation's gold? On gold, is he aware that Germany has increased its holdings of gold threefold, from £10 billion 12 months ago to more than £30 billion today?

The Prime Minister: I cannot work out the precise point that the hon. Gentleman is making, but I am sure that it is against Europe; of that we can be sure. The Bank of England has a diverse range of assets, as do other countries. Some countries have sold gold; some countries have not. I am entirely content with the way in which the Bank of England has handled the matter. I suggest to Conservative Members that they get a new obsession, as that one is wearing rather thin.

Mrs. Alice Mahon: Is my right hon. Friend aware that the comments of the Leader of the Opposition on law and order will sound pretty hollow to the people of Halifax, where the Conservatives are fielding a would-be councillor with a long criminal record, some of it as recent as last September? [Interruption.] The Leader of the Opposition and the shadow Home Secretary recently visited Halifax and the local police station, and must be aware of that man's activity. Will my right hon. Friend comment on the message that that sends to the people of my constituency?

Madam Speaker: Order. The Prime Minister has no responsibility for Conservative candidates.

Mr. Martin Bell: Following his meeting with the Royal British Legion last month, will the Prime Minister give favourable consideration to the case for a gratuity to former far east prisoners of war? More than 7,000 of them still survive, British heroes every one. Is not such a gesture to the living the best answer to those who would deface our monuments to the dead?

The Prime Minister: I have heard first-hand from former prisoners of war and from their relatives and friends about the appalling suffering that they endured when they were held prisoner in the far east. They are immensely brave people, to whom we owe a great debt. A few weeks ago, I, along with the Under-Secretary of State for Defence, met the chairman and secretary general of the Royal British Legion, and we agreed then that we would look again at the policy on the far east prisoners of war, including the question of compensation. That we are doing. I make no commitment at this stage, but we told them that we would consider carefully the points and the representations that they had made, and we will do so.

Ms Sandra Osborne: After years of Tory dithering, the Prime Minister will be aware how pleased we were in my constituency when the new Scottish air traffic control centre was given the go-ahead.

However, in the light of recent suggestions that that will be put at risk in the longer term by the proposed public-private partnership for National Air Traffic Services, what further assurances can my right hon. Friend give me today about the security of the 700 jobs in my constituency?

The Prime Minister: I know that my hon. Friend has campaigned long and hard on the issue and I can assure her that the strategic partnership agreement, which will be concluded under the NATS PPP, will guarantee the construction of the new Scottish centre at Prestwick and its continued operation as part of the two-centre strategy, and that construction will provide and guarantee the 700 jobs in Ayrshire.
As for NATS and the PPP more generally, it is important to realise that the whole issue of safety regulation will be kept in the public sector. What is done in partnership with the private sector will be the investment in the necessary infrastructure. Conservative Members may shout, but no one should forget that their policy is to sell off NATS in its entirety, whereas our policy is to retain a 49 per cent. stake for the Government.

Mr. Ian Taylor: As the Prime Minister is presiding over severe damage to the UK manufacturing base with the consequent harm to jobs, will he take the announcement of the welcome merger of the London and Frankfurt stock exchanges as an opportunity to give a clear signal of positive measures that he will take to bring the sterling crisis under control?

The Prime Minister: There was a moment during that question when Conservative Members stopped cheering.
We understand the problems caused by the strength of sterling, although that is more to do with the difficulties that the euro has had during the past few months. For example, the sterling-dollar ratio has barely changed. The worst thing that we could do is to try artificially to devalue the currency, and that we will not do. What we will do is carry on with the policies that provide stability in the long and medium term for Britain and its industry. I remind the hon. Gentleman that the last time a Government tried policies that failed to bring stability, in the late '80s and early '90s, we ended up with the loss of 1 million manufacturing jobs, a very deep recession and interest rates at 10 per cent. for four years or more, and I do not want to repeat that experience.

Mr. Derek Twigg: Is not it unacceptable that decades of inequalities in health should continue, and should not the record expenditure announced recently in the Budget be targeted towards reducing that inequality? That is particularly important in areas such as mine which has the highest child mortality in England, and that is why it is so welcome to have the extra £1.5 million for Halton general hospital and the 8 per cent. increase in spending for the North Cheshire health authority, in stark contrast to the Opposition's policies.

The Prime Minister: As a result of the extra money that has now gone into the health service, we shall be able not only substantially to increase funds in the next four years, but to bring about the necessary changes and modernisation to expand hospital service provision and to


deal with patients in a better way. Again, everyone should understand that that additional expenditure in the health service would immediately be taken away by a Conservative Government because the Opposition are committed to changing the tobacco duty and do not support that part of the health service funding plan, and their private medical insurance scheme would cause an immediate £500 million loss just for those who already have private medical insurance. Therefore, if ever there was a Conservative Government, there would be a £1 billion shortfall and the money that has gone to my hon. Friend's constituency would go out again.

Dr. Vincent Cable: Does the Prime Minister agree that one of the contributory factors to the growth of xenophobia towards asylum seekers, after the Tory leader, is the impact on council budgets in London and the south-east of England? Why did the Government capitulate to the shrill right-wing populist campaign from Kent county council, reimbursing all its costs, while London boroughs of all three parties, which behaved calmly and responsibly, will have to pick up the bill which, in my borough, amounts to £30 on an average council tax bill?

The Prime Minister: I do not accept the hon. Gentleman's comments about Kent. It was important for the Home Secretary to react in the way that he did because of the pressures on Kent county council. My right hon. Friend has made it clear that he is happy to see the hon. Gentleman to discuss the position in his constituency. There is a problem with the increasing number of cases, but we have dealt with that in the right way: by changing the system, making sure that the removals happen faster and that the cases are processed faster, and penalising those who bring people into this country illegally. That is the right way of dealing with the problem, not the wrong way, which is exemplified by the Conservative party.

Mr. Ben Bradshaw: Is the Prime Minister aware that Labour-run Exeter city council levies a lower council tax but delivers a higher level of service than any of the surrounding Tory or Liberal Democrat-run councils? It is the only council in Devon to be awarded beacon status for excellence. Does not that show that people are better served and better off—locally and nationally—with Labour?

The Prime Minister: I agree with my hon. Friend entirely.

Mr. Nick St. Aubyn: In the final advertisement of the official Labour party candidate in today's Evening Standard, he asked people to "Vote Frank", not for the Labour party. Is that because the party to which he belongs has deserted him throughout this campaign, or because the appalling scenes in Parliament square and at the Cenotaph have led the candidate to desert his party?

The Prime Minister: I do not think that the hon. Gentleman heard what I said earlier about the Conservative party candidate. The right policy for the tube is for the private sector to do what it does best: the building and construction work; and for the public sector

to do what it does best: running the service and being responsible for safety. The Tory party plans to privatise the tube. Nobody wants that.

Mr. Ian Davidson: Is the Prime Minister aware that while unemployment in my constituency has dropped by about a third since the general election, it is still the highest in Scotland? Does he agree that the removal of assisted area status from most of my constituency is not likely to be helpful in those circumstances? Does he further agree that it would be best if Govan Shipbuilders was kept on the Clyde?

The Prime Minister: Of course I believe that, but discussions are on-going about how the new map is allocated in the United Kingdom as a result of the changes that are happening all over Europe because of enlargement. My hon. Friend's point about unemployment is well taken: 800,000 or more jobs have been created since the general election, 200,000 of them through the new deal. Many people in every constituency throughout the country have managed to get work that they would not otherwise have got because of the new deal. [Interruption.] Conservative Members are trying to shout us down because people should know that the Conservative party is committed to scrapping the new deal and putting people on the unemployment scrap heap.

Mr. Peter Brooke: With further reference to Monday's events, when will the Government raise the pay of both uniformed and civilian police staff, especially in London, to maintain recruitment and particularly quality?

The Prime Minister: An offer is currently before the negotiating board. There is a real problem. It is difficult for many police officers to live in London because of the cost of housing here. My right hon. Friend the Home Secretary has put an offer before the police negotiating board, and we are in discussion about it. I hope that the right hon. Gentleman's question means that he will support us when we make additional public investment available for the police service.

Mr. Peter L. Pike: While the Prime Minister rightly recognises that what is happening to the Rover Group is primarily a west midlands problem, does he acknowledge that it is causing major job losses throughout the motor components industry, including in constituencies such as mine, where 600 redundancies have already been announced? That is especially worrying at a time when we, too, are losing assisted area status. Will my right hon. Friend make it clear that whatever hope is given to the west midlands will ripple to other areas that are affected by job losses in the motor industry?

The Prime Minister: Yes, we certainly see that as our task. When economic structural change affects people's jobs, it is our job as a Government to be on their side and to help them through that process of change. That type of economic and structural change is happening all over the western world and Europe. We cannot prevent some of that change, but we can try to help people through it, help them find new jobs when they lose their jobs and


help to support industry in any way we can. That is precisely what the Government are doing and will carry on doing.

Mr. Tim Boswell: May I ask the Prime Minister personally to look into the case of Colin Hughes? He is well known to many of us as a BBC producer, despite the fact that he is a wheelchair user and

dependent on a carer for almost all his essential personal functions. His support from the independent living fund is being subjected to a means test, which will effectively halve his income. Does the Prime Minister think that that can possibly be fair?

The Prime Minister: I do not know the facts of the individual case. I am perfectly happy to look into them, following the hon. Gentleman's question.

Zimbabwe

The Secretary of State for Foreign and Commonwealth Affairs (Mr. Robin Cook): With permission, Madam Speaker—[Interruption.]

Madam Speaker: Order. Will hon. Members who are leaving please do so quietly? We have been waiting a long time for this statement.

Mr. Cook: Thank you, Madam Speaker.
With permission, I will make a statement on the situation in Zimbabwe. Yesterday, I attended the meeting of the Commonwealth ministerial action group. I am pleased to report to the House that the meeting endorsed all our concerns. In particular, it recorded "deep concern" over the continuing violence, the illegal occupations, the failure to uphold the rule of law, and the political intimidation. It demanded fair elections, within the time required by the constitution of Zimbabwe.
The meeting agreed that the Commonwealth Secretary-General should visit Harare urgently in to bring home to the Government of Zimbabwe, and to make clear to the people of Zimbabwe, the concerns of the Commonwealth. I spoke in advance to most of the Ministers present yesterday, and I am pleased by the universal agreement that they gave at the meeting to our concerns. The outcome exposes the efforts of President Mugabe to pretend that only Britain is critical of the conduct of his Government. All Britain's concerns have now been supported by a body representing all the Commonwealth, chaired by one of Zimbabwe's neighbours.
A major reason why we received ready support yesterday was the recognition that Britain had taken every reasonable step to find agreement with the Government of Zimbabwe on a fair programme of land reform. At my meeting last week with their ministerial delegation, I confirmed that Britain was ready to help fund land reform, and that we were willing to take the lead in mobilising funds from other partners, such as the World bank, the European Commission and the United States. However, neither Britain nor any other donor is going to fund a programme of land reform unless it is conducted within the rule of law, is based on a fair price to the farmer, and reduces poverty among the rural poor who have no land.
Ministers in Zimbabwe have complained that Britain is imposing colonial conditions. There is nothing new about the conditions. They were all in the conclusions of the 1998 land conference, which was hosted and chaired by the Government of Zimbabwe. Nevertheless, last week the Zimbabwe delegation failed to give a commitment to bring the farm occupations to an end. I made it clear that, in those circumstances, Britain could not take further any support for land reform. Since that meeting, I have briefed Morgan Tsvangirai, the leader of the opposition movement in Zimbabwe. I have also spoken to Mr. Henwood of the Commercial Farmers Union, which has welcomed the firm line that we took on conditions for any help with land reform.
If the Government of Zimbabwe are genuinely committed to land reform, the way is open for them to make progress with international support. I am sorry to

say that the events of the past two weeks, and President Mugabe's inflammatory speech earlier today, suggest that the Government of Zimbabwe are interested in land reform only in so far as it creates a condition of crisis in which they can secure their re-election.
The whole House will deplore the mounting evidence of political intimidation of the people of Zimbabwe. Opposition campaigners have been ambushed and beaten up; commercial companies that display opposition posters have had their properties firebombed; rural communities have been threatened that it will be known which ballot box came from their village. By the end of the past month of election campaigning, 14 political activists had been murdered, all of them supporters of the opposition.
No election can be fair unless there is an election campaign free from intimidation. At our meeting yesterday we agreed that the Commonwealth should send election observers to Zimbabwe, and our statement stresses that they must be admitted as early as possible. At the weekend, I will be seeking the same demand from the European Union for early entry of European observers. Although the primary responsibility for ending the violence rests with the Government of Zimbabwe, the presence of international observers may help deter some of the brutality of recent weeks, and may give some confidence to those who want free expression for their views.
In the present circumstances of spreading violence, we have resolved that from today Britain will refuse all new licence applications for exports of arms and military equipment to Zimbabwe. That will include all licences for spare parts in connection with previous contracts, such as the Hawk aircraft contract. We are urgently reviewing all existing licences for exports to Zimbabwe.
Moreover, my right hon. Friend the Secretary of State for International Development has suspended the programme to support the supply of Land Rovers to the Zimbabwe police. As a result, the supply of the remaining 450 has been halted, and will not be resumed unless there is a clear determination by the Zimbabwe police to restore the rule of law.
Britain is willing to help, in the right conditions, with the economic and land problems of Zimbabwe. Britain has also taken the lead in mobilising international pressure for free elections—but no Member will want to approach our discussion on the basis of President Mugabe's claim that the solution to the problems of Zimbabwe lies in London. It does not. Zimbabwe has been independent for 20 years, and President Mugabe has been in power for every one of them. In that time, he has already received over £500 million of development aid from Britain.
It is Zimbabwe's choice what its future will be. However, that must not be the choice of the Government of Zimbabwe alone; it must be the free choice of the people of Zimbabwe, through fair elections without violence, without intimidation and without fear. That was the united message from the Commonwealth yesterday. I ask the House to send the same united message today to the majority of the people of Zimbabwe who want to live in a free democracy, and to be protected by the rule of law.

Mr. Francis Maude: I am grateful to the Foreign Secretary for his statement.
Zimbabwe should be one of the jewels of Africa—rich in natural resources, with some of the most efficient farming in the world, and with a judiciary that has remained robustly independent throughout the recent descent into lawlessness. Its people, who—black and white together—have lived in great harmony, have a vibrant desire for democracy. I think that we all admire the courage and resilience of those in the opposition parties who seem quite undaunted by a ruthless and systematic programme of brutal intimidation that has been countenanced, if not actually organised, by the governing regime. It is intolerable that a country blessed with so much should be brought to its current pass by the savage acts of one man and his acolytes.
As the Foreign Secretary said, everyone accepts that land reform is important; but, as he also said, this is not about land. This is about an ageing despot clinging desperately to power. Can the Foreign Secretary give a categorical assurance that he will not agree to further financial support for land reform without guarantees of lawful and ordered change, and until elections have actually happened?
I welcome the Commonwealth's decision to send observers to the elections to ensure that they are open and fair, but does the Foreign Secretary not think that the delays that have occurred in organising that may already have seriously compromised any elections that take place? The Foreign Secretary is aware—he said it—that much of the violence is geared towards intimidating voters in advance of polling day. Should not observers go to Zimbabwe now, rather than later? Should they not be headed by a group of senior international figures to make it as difficult as possible for Mr. Mugabe to ignore the ordinary requirements of democracy?
The House will be relieved that the Commonwealth has at last been mobilised to the cause. Does the Foreign Secretary accept that his first move, which was to engage the European Union in pressurising Mugabe, was a false step? In many instances the European Union is the right vehicle for action, but it is hard to imagine anything more calculated to entrench Mugabe than the spectacle of all the former colonial powers ganging up together against him. It was always obvious that the Commonwealth was the right family of nations to take action. Why did it take so long for it to get involved?
We welcome the decision to suspend exports of military equipment. Again, why has it taken so long for that decision to be taken? Of course it is right to suspend the supply of Land Rovers; they are clearly not being used to protect the citizenry from intimidation—but why not stop all aid that goes to the Government of Zimbabwe? Obviously, we should not stop aid that goes to help people in communities, but we know that Government-to-Government aid has had a long record of being diverted by the Government to their own personal ends.
Does the Foreign Secretary not agree that yesterday the ministerial action group should at least have started the process of suspending the Mugabe regime from the Commonwealth to remove any veneer of respectability that still attaches to it, as many people in Zimbabwe, both black and white, wish? It is ironic that it was the Zimbabwean Foreign Minister who chaired the Commonwealth ministerial action group that suspended Nigeria from the Commonwealth in 1995.
Fifty years after decolonisation began, do we continue to make excuses for African dictators based on some misplaced notion of post-colonial guilt, or should we not believe today that African leaders should share the same values that African people deserve no more and no less than people from other Commonwealth nations?

Mr. Cook: I welcome the broad tone of the right hon. Gentleman's approach to the discussion, which is an improvement on our previous exchange. It is important that we should send as united a message as we can to those who are listening to the debate on BBC World Service.
I fully agree with a number of the points that the right hon. Gentleman has made. I agree that Zimbabwe's tragedy is that it could be one of the wealthiest countries in Africa, yet currently has one of the greatest economic problems in Africa.
I greatly admire the opposition leaders who have shown such courage in recent weeks. I spoke, as the right hon. Gentleman did, to the leader of the opposition when he was in London. As he has spoken to him, he will be aware that Morgan Tsvangirai has strongly urged us not to take economic sanctions against Zimbabwe precisely because it would play into Mugabe's hands by reinforcing his claim that Britain, not his policies, is the problem. I strongly urge the right hon. Gentleman to accept that advice, as I have done, from someone who has shown great courage in taking on the authority of President Mugabe.
On the specific questions that the right hon. Gentleman asked, I can of course give him a categorical assurance that there will be no assistance for land reform without a return to the rule of law and without the 1998 conditions being met in full. Those, of course, require the existence of some form of democratic process and good governance within Zimbabwe. Therefore, I can also say that there will be no assistance this side of elections, which should in any event be held imminently; if they are to be held within the constitution of Zimbabwe, they must be declared by July.
Yesterday, we discussed in the Commonwealth ministerial action group the possibility of finding a senior, preferably African, figure to lead the observer team, who would carry authority within Zimbabwe and beyond it.
As for the engagement of the European Union, I know that Opposition Front Benchers have scant time for that body, but it is the natural and right place for Britain to start to mobilise the international community. If we cannot get the European Union behind us, who else are we going to get behind us? [Interruption.] I discussed the matter with the Secretary-General of the Commonwealth four weeks ago.
The unanimous nature of the decision that we reached yesterday demonstrates the degree of successful lobbying at all levels in the Commonwealth. Indeed, concern has been expressed about Zimbabwe throughout the world. I particularly appreciate the strong support of the United States, and I welcome the mission that the Southern African Development Community sent to Zimbabwe. Its leaders know the extent to which the situation there could destabilise the entire region.
The right hon. Gentleman raised again the idea of suspending aid. However, much of the aid that we provide goes to the most vulnerable people in Zimbabwe.


The largest single projects that we support are those that combat the spread of AIDS. As 25 per cent. of the population of Zimbabwe is already HIV-positive, can it really be sensible to pull the plug on those projects, many of which are necessarily undertaken through the Government because they involve health matters? If we were to take that step, the only result that I can perceive is that we might convince the people of Zimbabwe that President Mugabe was right, and that, when it came to solving their problems, Britain was an enemy, not a friend.
Finally, the rules for suspension from the Commonwealth are well set out in the Millbrook action plan, a document adopted by the previous Conservative Government and endorsed at the most recent Commonwealth meeting. The rules make it quite clear that suspension becomes an option only if a Government becomes unconstitutional. Nigeria and Pakistan had unconstitutional military coups. Much as we deplore the nature of the policies of President Mugabe, his Government are in power constitutionally—although that will change if elections are not held within a specified time.
I end on a note of agreement with the right hon. Gentleman. I agree that the chief burden of bringing home to President Mugabe the damage that his policies could do to Zimbabwe and the rest of Africa must lie with African leaders. Many of them know that the situation in Zimbabwe could start trouble in other African countries. They all know that it is in danger of creating a threat to investor confidence not just in Zimbabwe but in Africa as a whole. That is why many of them have expressed to me and to President Mugabe their concern at his actions. It is important that we work with them, and demonstrate to them both that we are willing to help and that the failure to reach agreement was not our failure, but that of the Government of Zimbabwe.

Mr. Donald Anderson: The strong words of condemnation from the United Nations, the Commonwealth and the European Union are indeed most welcome, but does my right hon. Friend agree that the most effective pressure is likely to come from the creditors—both private and public—and from the region because, as he has rightly said, there is a real danger of destabilisation, a decline in investor confidence and a movement from the region of trained personnel who no longer see their future there, where their skills and that investment are desperately needed? Does he agree that at the forefront should be South Africa, which is the regional power that stands to lose most and is already a major creditor, particularly in terms of the debts owed by Zimbabwe to ESKOM, the power parastatal? Is he confident that President Mbeki is prepared to move from good offices and quiet diplomacy to rather harder and more effective pressure, given the likely adverse consequences for South Africa?

Mr. Cook: I welcome the recent statement by President Mbeki, well reported in the South African press, that there must be an end to the violence and the farm occupations. I have also noted the statement by the Deputy President of South Africa, Dr. Zuma, that the actions being taken in Zimbabwe are rather curious in that they are outside the constitution which President Mugabe himself helped to write. There is clearly growing pressure within South

Africa, which is reflected in the statements of concern by its leading ministers about what is happening in Zimbabwe.
The situation in Zimbabwe is, of course, a powerfully legitimate national interest for South Africa. Zimbabwe is its major African export market. Already one car factory in South Africa has been closed, and collapse of the Zimbabwe market has been cited as the reason. It is very much in the interests of South Africa and of the other neighbouring countries that they assist us in resolving the political crisis in Zimbabwe, to pave the way for economic progress.

Mr. Menzies Campbell: I welcome not only the fact that the Foreign Secretary has made a statement, but the terms of that statement, particularly the announcement of the suspension of exports of arms and arms-related equipment. Perhaps I might acknowledge the creativity of the Government lawyers, who seem to have found a solution to the contractual obstacles that some weeks ago apparently stood in the way of such a suspension. That is entirely welcome.
Do we not have to recognise the unpalatable fact that the United Kingdom acting alone has less influence over events in Zimbabwe than we should prefer, which makes yesterday's statement by the Commonwealth all the more important? Was it not entirely sensible to invoke the interests of the European Union when it was expected to make a contribution to the funds necessary for the redistribution of land?
I also agree with the Foreign Secretary when he acknowledges the fact that realism dictates that the greatest influence over Zimbabwe will come from its neighbours, such as South Africa, whose economy is already feeling the adverse effects of instability in the region.
Is it not a terrible indictment of the Mugabe Government that they have embarked on that provocation of unrest when inflation is at 50 per cent., unemployment is at 50 per cent., and there are estimates that 25 per cent. of the population may be HIV-positive? Would not a responsible Government be turning their attention to those problems?

Mr. Cook: I yield to the right hon. and learned Gentleman concerning his expertise in lawyers' creativity, which never ceases to amaze me. He is right to say that acting alone is less effective than acting together. In the past month, we have therefore pursued a conscious strategy of seeking to mobilise international opinion. We have had universal support wherever we have turned for support and assistance in the matter.
I personally do not regret that acting alone we are less effective than when acting with others. That precisely underlines the fact that the problem is not Britain's alone, and that, primarily, it is not even the international community's problem. Primarily, it is the problem of the Government of Zimbabwe. It is their responsibility to resolve the crisis that they face.
The right hon. and learned Gentleman eloquently recited some of the telling figures and statistics of the Zimbabwean economy, and he was right on every point. I should add that Zimbabwe is totally bankrupt in foreign exchange, which is why it currently has an oil shortage and why—with the price of the Zimbabwe dollar set at


a wholly unreasonable level in relation to international prices—it finds it difficult to persuade tobacco farmers to sell their tobacco. I agree with him that those are the real issues on which the election should be fought. I think that the truth is that President Mugabe and his Government are talking up the land reform issue precisely because they would rather not face those issues.

Mr. David Winnick: Did my right hon. Friend see the report in a Sunday newspaper that thugs from the ruling party went into a town, savagely beat five active members of the opposition, and displayed those five people before the town, obviously to intimidate others? Two of the five people are reported to have died. Those deaths and beatings are, of course, in addition to the murders and the intimidation of the press that has been occurring in the past five months.
Although I recognise what my right hon. Friend said about the Commonwealth, if the situation continues as it is, will there not come a time when it is totally unacceptable for that country to remain in the Commonwealth? If it does remain in such circumstances, inevitably the question will arise whether, other than in the case of a military coup, countries should be entitled to remain in the Commonwealth regardless of events such as those in Zimbabwe, with all the beatings, killings and intimidation that are occurring there.

Mr. Cook: I absolutely share my hon. Friend's concern about the beatings that have taken place against those courageous enough to identify themselves with the Opposition. There have been reports of teachers beaten up in front of their class and the pupils invited to go home and tell their parents what happens to those who support the Opposition. Actions such as those are wholly inconsistent with even the basic beginning of the concept of a free and a fair election campaign.
My hon. Friend raised the issue of the Commonwealth. Yesterday saw the first meeting that the Commonwealth has held since the crisis began. Therefore, decisions taken yesterday were the first decisions. Sending the Secretary-General of the Commonwealth to express our deep concerns is very high up the escalatory ladder of Commonwealth action. However, I assure my hon. Friend that Britain is certainly not alone in the Commonwealth in our concerns. All the eight countries present yesterday share those concerns. They are widely held by members of the Commonwealth outside those who attended yesterday, and I do not believe that the Commonwealth will accept an outcome if its observers report continuing intimidation when they arrive.

Mr. Nicholas Winterton: I have immense affection and regard for Zimbabwe and its people. It is a country which I know well, and I believe that it offers greater potential than perhaps any other country in Africa for progress in the southern part of Africa.
I endorse everything that the Secretary of State has said today. Would he not accept, however, that the holding of free and fair elections is already compromised, and that without the involvement of people such as police from other African countries or from South Africa, under the leadership of President Mbeki and his recently retired

predecessor, the chances of holding free and fair elections are minimal? That would be a tragedy, and the result would not be to the benefit of all the people of Zimbabwe.

Mr. Cook: I welcome the hon. Gentleman's support, particularly as I know that he speaks from personal authority and experience. No reasonable person could disagree with the hon. Gentleman's proposition that a free and fair election has already been compromised by the events of the past month. We are anxious to deploy international observers as soon as possible to seek to deter further political intimidation and to see whether we can create fairer conditions in the run-up to an election. It will be for those observers then to report on what they see and on the conduct of the elections. They are very much wanted by the Opposition. I hope that we can deploy them as soon as we can get agreement from the Government of Zimbabwe, without which we cannot deploy them. I hope that the observers will produce a more balanced election campaign than the one that we have seen so far. They will be free to report on the outcome and we will consider their report very carefully.

Ann Clwyd: I, too, welcome what my right hon. Friend said about the sale of arms and associated equipment to Zimbabwe. How concerned is he about reports in African newspapers that the spares for Hawk aircraft sold by this country to Kenya are being re-exported from Kenya to Zimbabwe? Has he investigated this story and, if so, how does he propose to close that loophole?

Mr. Cook: I am not aware of the precise reports in the African newspapers to which my hon. Friend refers, but I shall certainly look into the matter and write to her about it. There is a serious problem that, in applying arms closures of the kind that we have previously applied to other countries, a black market springs up for the spares that already exist in large numbers around the world. I can therefore give no guarantee that the British Government can halt the supply of spares that are no longer within the control of the British Government or of British territory. However, I will happily look into the matter and consider whether a protest to the relevant Government would be appropriate.

Mr. Michael Howard: Further to the first point raised by the right hon. and learned Member for North-East Fife (Mr. Campbell), will the Foreign Secretary now acknowledge that his welcome decision to suspend the licences for the export of military equipment to Zimbabwe gives the lie to the assurances that he has previously given the House in relation to licences for the export of military equipment to other countries, including Indonesia, that he had no such power to suspend such licences?

Mr. Cook: A welcome from the right hon. and learned Gentleman is always warmly received, even if it is rather grudgingly given. On the parallel that he makes, the fact of the matter is that we halted new licences to Indonesia during the embargo. Today, I announced that we are to stop all new licences.

Mr. Howard: For spares?

Mr. Cook: All new licences, whether for spares or for new equipment, will be stopped. There are between a


dozen and 20 existing licences only. Reviewing them is a totally different proposition from the 19,000 that we inherited from the previous Government when we took over at the general election.

Mr. Ted Rowlands: I, too, welcome my right hon. Friend's decision to ban any further exports of military equipment to Zimbabwe. Is he aware of any other country, in particular a European Union partner, that may be trying to sell Zimbabwe such arms or military equipment? If so, will he make representations to ensure that the embargo is as effective as possible?

Mr. Cook: I assure my hon. Friend, who has raised an important matter, that we will draw the attention of all our European Union partners to the decision that I announced today. Under the EU code of conduct, we would expect to be consulted by any partner country that is contemplating a sale to Zimbabwe, although I am not aware of any country that is doing so.

Sir Peter Emery: The right hon. Gentleman is right to want to ensure that the whole House speaks with one voice in condemning the action that President Mugabe is taking. I am certain that that is the case—on both sides of the House and in all parties—and it is important that Mugabe should realise that.
Will the right hon. Gentleman take action on two fronts? First, will he clear up one matter? Were certain Ministers pressing Zimbabwe to go ahead with, or press for, a loan from the International Monetary Fund only a few weeks ago? What is the Government's position on that and on any other IMF lending that might go to Zimbabwe? Secondly, will he try to ensure that when the election comes, we get an absolute assurance that monitoring will take place with no restriction? The hon. Member for Merthyr Tydfil and Rhymney (Mr. Rowlands) and I were involved in monitoring the original elections in southern Rhodesia, which brought Mugabe to power. He and I know that, unless there is complete co-operation from the authorities, it is too easy to stop a proper and full monitoring exercise during the elections. It is imperative that we get an assurance that monitoring can proceed without restriction.

Mr. Cook: I am grateful to the right hon. Gentleman for his bipartisan approach to the issue. On the question about the IMF, I must put it on the record—because there have been claims in Harare that are unfounded—that although it has been claimed that Britain is making the existence of an IMF package a pre-condition of our support for land reform, that is not the case. We are prepared to go ahead with land reform without there necessarily being an IMF package. Having said that, Zimbabwe plainly needs such a package. It has no foreign exchange reserves, so there is a severe fuel shortage, which is holding back harvesting and economic progress. Therefore, although it is certainly desirable that Zimbabwe should obtain a package, to do so it must meet the full conditionality of any IMF support.
Finally, on observers and monitoring, we must have two separate categories in mind: international observers to oversee and report what is happening; and independent monitors at polling stations throughout Zimbabwe, who should mainly be local residents. We are willing to help with their training. The United States has already offered

a considerable sum to assist in training monitors. Working together, they may be able to create the free and fair conditions that are desirable, but, together, they will need to add up to significant numbers.

Mr. Peter L. Pike: Having led a Commonwealth Parliamentary Association delegation to Zimbabwe in 1998, I very much regret the rapidly deteriorating situation in that country. I also regret that my right hon. Friend has had to make this type of statement, although I obviously fully endorse and welcome everything that he said, given the unfortunate position. I am sure that he recognises that many people in ZANU-PF in Zimbabwe do not agree with the position that Mugabe is taking. Will he spell out a clear message that now is the time for those people to stand up against the leadership of the party and, perhaps, to lead a new party forward to fight the elections?
Finally, can my right hon. Friend be absolutely sure that the Commonwealth and European Union observers we send in will have the freedom and security to go all over the country—to rural and urban areas—to see that the election is free and fair?

Mr. Cook: I fully share my hon. Friend's concern on the latter point. On divisions in ZANU-PF, my hon. Friend is right to point out that, from the information available to us, many in that party understand that present policies will not restore the economic situation in Zimbabwe and are thus likely to contribute to further erosion of support for ZANU-PF among the people of Zimbabwe. Indeed, in the primary elections, the official candidate was deselected in eight constituencies. It says a lot for the style of ZANU-PF's leadership that they have ordered the primaries to be rerun until they get the right result.

Sir Teddy Taylor: The Foreign Secretary and his colleague, the Minister of State, Foreign and Commonwealth Office, the hon. Member for Neath (Mr. Hain)—who was busy elsewhere at the time—will recall the discussions 20 years ago. Does the right hon. Gentleman accept the simple fact that the power of the British Government to influence events is virtually nil and that the action he proposes will merely give Mr. Mugabe a feeling of importance and significance that he does not deserve? Does he agree that the best course we can take to help the people of Rhodesia—[HON. MEMBERS: "Oh."]—of Zimbabwe is to concentrate aid and assistance in the Republic of South Africa to help its people to build up their freedom, liberty and prosperity so as to protect them against the consequences of the serious problems in Zimbabwe? Does he accept that trying to be the emperor of the world will not solve the problems of Zimbabwe and its people? That is something which he and his colleagues should have learned a long time ago.

Mr. Cook: With great respect to the hon. Gentleman, I shall try to maintain the calm and measured tone of the discussion so far. In my statement, I said repeatedly that the responsibility for this problem lies in Zimbabwe. The country has been independent for 20 years and its Government must accept responsibility for its present state.
Had I not made a statement to the House, I should have been open to fair and justified criticism from the House. There is immense interest in what happens in Zimbabwe


among the public and in the Parliament of Britain. Many people in Zimbabwe look with great care, and with some hope and anticipation, to see whether we share their concerns and whether we are worried about them.

Mr. Gordon Prentice: How many British passport holders are there in Zimbabwe? Are contingency arrangements being made to receive them in this country, should the situation in Zimbabwe spin out of control? Is it part of Mugabe's grand plan to get rid of non-Zimbabwe citizens from his country?

Mr. Cook: We cannot be certain how many there are—especially as we should have to take into account those who held dual nationality and were not solely British nationals—but the number is large.
When I heard President Mugabe's speech this morning, I was struck by one of the most purple passages, in which he leapt on press reports of evacuation plans for 20,000 British citizens. He told his rally that Britain was prepared to receive those people and invited ZANU-PF to show them how to leave the country. I ask the House to take that as a warning. It does not help to calm the situation in Zimbabwe or to defeat President Mugabe for us to engage in alarmist talk about evacuations. Of course, we shall take our position seriously and we shall consider what we should do, but no Member of the House should encourage alarmist statements about mass evacuation.

Mr. Julian Brazier: I welcome the Foreign Secretary's comments on co-operation from other Commonwealth countries and the particular emphasis that he put on trying to secure free and fair elections in Zimbabwe—if that is still possible. However, if there is a continuation of the present programme of ethnic cleansing on the farms and of intimidation on the scale that appears to be going on in the country, does he agree that we may have to consider options that go beyond words and the cancellation of a few contracts?

Mr. Cook: We will take every reasonable and responsible step to make sure that our concerns are forced home, but I will not take actions that will be counterproductive and I will not take actions that the Opposition in Zimbabwe have asked me not to take. I suggest that the House listens to that advice.

Dr. Norman A. Godman: I agree wholeheartedly with my right hon. Friend's view that a fair system of land reform must include, among other things, a fair price for the farmer and a reduction in rural poverty, but for the farmers living through deeply distressing times, more than that is demanded, is it not? Farmers who feel compelled to sell their home and farm should be allowed to take their assets and equipment with them if they wish to farm in another country. I urge my right hon. Friend to ensure that any funding agreement for land reform gives that protection to farmers who wish to emigrate from that bedevilled country.

Mr. Cook: My hon. Friend raises some reasonable points. To the extent that we find ourselves funding such a programme if the conditions and circumstances arise, we shall have to consider whether the money is paid within or

outside Zimbabwe. Many of the farms are mortgaged to the banks in Zimbabwe. A policy of confiscation without compensation will rapidly produce further financial ruin for Zimbabwe, and not just for the farmers.

Mr. Gerald Howarth: As one who visited Rhodesia in 1967 and who has albeit distant relatives farming out there at this time, I share the Foreign Secretary's view that what is happening is an absolute tragedy. As my right hon. Friend the Member for Horsham (Mr. Maude) said, Zimbabwe should be the jewel of Africa. I press the Foreign Secretary on the question of British aid for what he calls land reform, which is no less than the seizure—with or without compensation—of commercial, white-run farms. Given that those farms constitute one of the most productive assets of the Zimbabwean economy, and that they provide employment and security for a great many people in rural areas, how does the right hon. Gentleman believe that another penny of British taxpayers' money will benefit the rural poor? Before he agrees to another penny going down that particular plughole, will he tell the House what happened to the last slug of £44 million of British taxpayers' money and how much of the land that was taken from white commercial farmers and redistributed to Mugabe's cronies is now in productive use, and how much is lying fallow?

Mr. Cook: I am advised that about 3 million hectares have already been purchased under the land reform scheme, including £44 million that was provided from 1980 to 1990.
There is a real problem of poverty in the communal areas where there are people without land and it is widely accepted, and was not contested by the previous Government, that the programme for tackling rural poverty should include land reform on a fair and reasonable basis. As for farmers being forced to sell, 100 farms are already for sale. To be frank, many of those farmers would welcome a programme of land reform in which they could receive a fair price. It is bogus for the Government of Zimbabwe to pretend that they need further powers to force farmers to sell. There are many willing sellers. In the right conditions, they would welcome a programme under which those farms could be purchased.

Mr. Ian Bruce: To probe a little further the subject of land reform, can the Foreign Secretary tell us of any country where large, privately owned, productive farms have been improved by splitting them up and giving them to small farmers? I suspect that he cannot. So why does he keep promising that, with the right conditions, he will spend millions of pounds of British taxpayers' money to ruin the farming economy in Zimbabwe? Surely he should say now that it is a failed policy which should not go ahead, and that we should put any aid into genuinely helping the rural poor rather than promise the kind of things that the Communist party used to promise.

Mr. Cook: I think that I have to remind the hon. Gentleman that the Government have not put in a single penny to land reform purchases whereas the Conservative Government whom he supported put in £44 million to the


land reform programme. [Interruption.] As I hear from behind me, the landless poor in rural areas see that as the way forward.
I invite the House to step back for a moment. We have a perfectly proper international obligation to insist on the rule of law, to object when court orders are not carried out and to make sure that there is a free and democratic process for the people of Zimbabwe fairly to express their views. However, it not for us to say what the policies should be.

Mr. Graham Brady: President Mugabe first set this course of action a year ago and, last summer, I first raised the matter with the Foreign Secretary in the House. Why did it take until four weeks ago for the Foreign Secretary to meet the Secretary-General of the Commonwealth to discuss this issue, and why has it taken until today to suspend arms exports to Zimbabwe? Surely, the Foreign Secretary could have acted sooner and could have had a real effect on the situation before it reached the dreadful proportions that we now see.

Mr. Cook: On the question of when I saw the Secretary-General of the Commonwealth, I saw him four weeks ago, because he took up his post five weeks ago.
On arms exports, no licences have been granted by this Government for military equipment to Zimbabwe since the conflict in the Democratic Republic of the Congo began. We resumed, under strict conditions, licensing in February this year and we have again suspended it. I have to say that what we did in the period between October 1998 and February this year appeared to have no marked effect on the policy of the Government of Zimbabwe.

Mr. Nick St. Aubyn: We all recognise how the breakdown of human rights in Zimbabwe affects all its citizens, but those of us with family members in the country are naturally particularly concerned about their safety and their future. Do the Government recognise a responsibility to advise those who have a right of abode in this country as well that, if the point is reached when their safety is threatened, they should come to this country? In the event of such a situation arising, do the Government agree that the first call on taxpayers' money should be not a land reform programme that would finally assimilate those Zimbabwean citizens into their society, but help for those who are forced out of that country

against their will and who would regrettably have to return to this country? They would need assistance from this Government first.

Mr. Cook: Of course, the British Government take very seriously, and know full well, their responsibility to British citizens wherever they are. However, I gently say to the hon. Gentleman that I can think of nothing more likely to incite President Mugabe further to persecute British citizens than to say that we are ready to take them if the circumstances arise and that we will financially support them. Of course we will carry out our obligations, but I suggest to the hon. Gentleman that we should not use language that President Mugabe will use in a speech tomorrow.

Mr. Robert Jackson: I warmly welcome the Foreign Secretary's statement, but will he continue to ensure that he does whatever he can to avoid enabling President Mugabe to turn this debate and controversy into a battle between Britain and himself, because that may help him in his election?

Mr. Cook: I very much share the hon. Gentleman's objective. In everything that I have said, I have sought to make it clear that, although we have problems with the policies of President Mugabe and in particular with his adherence to the rule of law and democratic process, we are a friend of the people of Zimbabwe. In all that we do, we want to make sure that we assist them.

Mr. John Bercow: What assessment has the Foreign Secretary made of the cost of Zimbabwe's external troop deployments, notably in Zaire? Was that matter discussed by Commonwealth Ministers and would it be a material factor in the thinking of the right hon. Gentleman in deciding whether the Government should support—and, if so, to what tune—land reform in Zimbabwe?

Mr. Cook: The cost of the Zimbabwean Government's actions in the Democratic Republic of the Congo is substantial. It is a point which we have repeatedly raised, and Britain was the only donor present at the 1998 conference in Harare to express concern about that and to say that the removal of that cost would assist in creating the economic and social conditions necessary for progress in Zimbabwe. I also raised the point with the delegation when it was here last week.

Point of Order

Mr. Ian Bruce: On a point of order, Madam Speaker. I seek your guidance on whether Members of Parliament are exempt from the various electoral offences legislation. You will have noted that the hon. Member for Don Valley (Caroline Flint), when asking a question to the Prime Minister, sought to give the House information about an on-going count taking place in her constituency. We read every time that we go to a count that it is an electoral offence to give information about the number of people who voted, or how they voted, until the electoral returning officer has made a declaration. I seek your guidance on whether such information should be made available in the House.

Caroline Flint: rose—

Madam Speaker: Order. It is a point of order for me. Let me deal with it. The comments to which the hon. Member for South Dorset (Mr. Bruce) refers were made as part of proceedings in Parliament.

Children's Rights Commissioner

Mr. Hilton Dawson: I beg to move,
That leave be given to bring in a Bill to provide for the establishment of a children's rights commissioner to promote the rights and interests of children in England; to make provision for the powers and duties of the commissioner; and for related purposes.

Madam Speaker: Order. I believe that the hon. Member for South Dorset (Mr. Bruce) did not advise the hon. Member for Don Valley (Caroline Flint) that he was going to raise a point of order that concerned her, although she happened to be in the Chamber at the time. It is usual to tell an hon. Member that he or she will be referred to on a point of order.

Mr. Ian Bruce: Madam Speaker, I have been in my place throughout.

Madam Speaker: Order. The hon. Gentleman might have informed the hon. Lady on another occasion. He usually observes the courtesies of the House, and that is why I remind him of them on this occasion.

Mr. Dawson: On Monday, we had a gang of fools outside the House throwing around hate, obscenities and their weight. They were telling us how radical they are. It was pathetic nonsense. It is the Bill that is properly radical.
The Bill is founded on an understanding of something that all of us as adults are tempted to ignore, and that is that children are powerless and have no voice. It is easy to ignore children and put them aside. At best, we often treat them as objects of concern rather than human beings with rights and a developing sense of who they are and who they want to be.
Children are the hope of the world. There are good people on both sides of the House who care about their well-being and who want to help, but children are still ignored and abused in one of the richest countries on earth. Millions are undone by poverty. They are undermined by restricted opportunities, crummy services and poor and sometimes downright neglectful parenting. As a result, some die. Many prosper and do well, but many more just get by and get through. We could do so much more for all of them and with all of them.
It is a good Bill, but I had no hand in its creation. It was drafted by Peter Newell, a leading advocate for the human rights of children. Thanks to the National Society for the Prevention of Cruelty to Children and 100 children's organisations which support it, I am able to claim that this is the best supported ten-minute Bill of this Parliament, and perhaps of many previous Parliaments.
Thousands of people have contacted hon. Members about the Bill. Every hon. Member must have received at least one letter from a constituent asking him or her to support it. Its time has truly come. The Government have great ambitions for children and I believe that they could bring things about. This is a year of terrific progress because we now know what the Government are going to do in Wales. That is good for Wales, the Welsh Assembly and for Sir Ronald Waterhouse.
I am delighted that the Government have said that they are to bring forward an amendment to the Care Standards Bill and introduce further legislation to ensure that all children in Wales have access to a commissioner for children. However, the issue is fundamental and of overwhelming importance to all children in the United Kingdom, as well as to the concepts of citizenship that the Government and every Member of this place should be keen to promote.
We shall fail all the 13.2 million children in the United Kingdom if we do not understand that rights and the necessity for an independent body to promote those rights are as important in relation to children as they are in relation to race, equal opportunities and disability.
Children are powerless by definition because they have no vote. The one simple message from the grim succession of child abuse inquiries is that children have no voice. Until we truly hear what children are saying to us and until we have a children's champion—a commissioner for children's rights—we shall continue disregarding them and repeating the mistakes of past.
As a social worker with children, I supported the proposal for many years and have continued to pursue the matter since arriving in the House of Commons three years ago. I am humbly aware that colleagues—many of whom are in the Chamber and have been here much longer than I have—have been assiduous in pursuing the matter over the past decade. The 1992 Labour manifesto proposed having a commissioner, and the post has been recommended by successive Health Committee reports, most recently in 1998. Whenever they can, colleagues on both sides of the House raise the matter.
The proposal for a children's rights commissioner is the epitome of joined-up Government and would be a proper foundation for modern services for children based on our commitment to the United Nations convention on the rights of the child. The commissioner would promote the participation of children and young people in society in future. He would analyse the impact of Government policies on children and would provide the ultimate backstop to ensure that systems designed to protect children do not let them down.
The commissioner would need real power to investigate and undertake public inquiries, produce his own reports and require that he is consulted. He would also need power to insist that Departments and other bodies issue child impact statements on policy proposals and to ensure that he is involved in the reporting obligations of Government under the UN convention on the rights of the child.
I have heard only one Government criticism of the proposal, which is that it would be bureaucratic. On the contrary, the post of children's rights commissioner would be exciting, challenging, enabling and empowering.
Ideally, a children's rights commissioner for England would have linked offices in Northern Ireland, Wales and Scotland. The post would be statutory and would have good links with Government at Westminster and in devolved areas. The commissioner would, above all, be known to every child in the land, and he would commission surveys and research and listen to children. He would help to develop structures at every level to enable children to participate in decision making.

He would represent their views at the highest level, scrutinise the impact of proposed policies on children, consult them and ensure that their voices are heard.
The commissioner would have a small staff. It would be impossible and, indeed, inappropriate for him to take on the problems of every troubled child. However, he would have a crucial role in ensuring that existing systems work and that children do not fall through the net. He would have a good link to organisations such as Childline and could use his position as a figurehead to ensure that children who turned to him got the appropriate help at the proper level.
I congratulate the Government on the establishment in the Care Standards Bill of a children's rights director, who will have responsibility for the 55,000 children in local authority care and the 150,000 living away from home in residential and boarding schools. That is an important step, and the director will perform a vital role which, however, should not be confused with that of a commissioner for all children. Indeed, it should not be characterised as such.
All children need to be listened to and have their rights protected. That is not an attack on parents, all of whom should be firm advocates of children's right to question how we look at the world and assert their ideas of how things should be.
The Care Standards Bill will soon come before the House and, along with the necessary amendments and subsequent legislation, will ensure that children in Wales will be on a par with children in Austria, Denmark, Iceland, Norway, Spain, Sweden, Australia, British Columbia, New Zealand and South Africa. Why cannot that be the case in England and the rest of the United Kingdom?
A children's rights commissioner could help to change how we relate to children and engage with them properly as citizens of tomorrow rather than the passive objects of our concern. The Government have vision, and commitment to fundamental change would be praised by all those NSPCC letter writers, all the supporters of the 100 child care organisations throughout the land and millions of decent people across the United Kingdom. Even more important, it would be praised by those adults of the future who, having grown up with a children's rights commissioner, would look back on its creation as a great reform—one that equipped them to express themselves more articulately and to challenge more effectively than Monday's mob outside.

Question put and agreed to.

Bill ordered to be brought in by Mr. Hilton Dawson, Mrs. Llin Golding, Mr. Alan Simpson, Mr. David Drew, Mr. Paul Burstow, Angela Smith, Mrs. Betty Williams, Mr. Mark Todd, Mr. Ian Stewart, Mr. Russell Brown, Ms Julie Morgan and Charlotte Atkins.

CHILDREN'S RIGHTS COMMISSIONER

Mr. Hilton Dawson accordingly presented a Bill to provide for the establishment of a children's rights commissioner to promote the rights and interests of children in England; to make provision for the powers and duties of the commissioner; and for related purposes: And the same was read the First time; and ordered to be read a Second time on Friday 9 June, and to be printed [Bill 119].

Orders of the Day — Finance Bill

(Clauses 1, 12, 30, 31, 59, 102 and 113)

Considered in Committee [Progress, 2 May].

[MR. MICHAEL LORD in the Chair]

Clause 31

CHARGE AND RATES FOR 2000–01

Question proposed, That the clause stand part of the Bill.

Mr. Edward Davey: I rise to oppose clause 31, not only because the Liberal Democrats reject the clause, but because we reject the Government's whole strategy on the nation's income tax system. We want to use the debate both to focus on our long campaign for more investment in our schools paid for out of income tax, with which I shall deal later, and to argue that the Government's whole approach to the personal tax system lacks a coherent strategy.
The Government need to go away and think again. They should not be given statutory cover to collect income tax in the coming year unless Ministers produce on Report a new clause or clauses that address three issues. First, they must revisit their policy of never raising the basic rate of income tax. The Government might say that that was an election pledge, but they did not pledge to cut income tax, which they have done, thus depriving our schools, hospitals and public services of much-needed funds. They should reject that policy, not only in the context of funding public services, but in the context of managing the economy—to enable investment to be made at a time when the economy is growing quite strongly.
Secondly, we believe that the Government need to go away and think about how they are adding unnecessary complications to the income tax system. They promised to simplify that system, but they have done the opposite. That lays unnecessary burdens on business and on individuals, especially those who have low incomes, who are least able to understand the complexities of the system and least able to afford professional advisers to help them to fill in their tax return.
Thirdly, we believe that Ministers must design the income tax system to help to produce a fairer society. The l0p tax rate set out in the clause is a gimmick. Without more serious reform of the tax system, at the bottom and at the top end of the scale, we shall not produce the sort of social justice that Labour talks about, but has done far too little to bring about. So, there are three major charges of failure in the approach to the income tax system that the clause fails to put right.
I shall start with the charge that the Government are obsessed—in the way that the Conservatives were—with cutting the basic rate of income tax. There are three reasons why Liberal Democrats oppose the cut proposed in the clause. The first is our belief that more resources should be made available to schools.
The Government's record on investment in education is very poor. They promised—this was a pledge in their election manifesto—that
Education will be our number one priority, and we will increase the share of national income spent on education as we decrease it on the bills of economic and social failure.
However, assuming a spring or early summer election in 2001, the amount spent on education as a proportion of national income will have fallen by the end of this Parliament. On current projections, that spending will be 4.6 per cent. of gross domestic product compared with 4.7 per cent. in the last year under the Tories and 5 per cent. for the whole of the previous Parliament. How can the Government claim to be delivering on their education pledges when there will be a reduction in the amount that they have made available?
The Government claim that they are providing a huge largesse of £19 billion in the first comprehensive spending review, but when one looks at that figure and takes account of inflation and of double and triple counting, one finds that the figure falls to a mere £6.1 billion. When one strips out the permissions to spend, which are not real resources provided by central Government, the figure falls to just £3 billion. That is not sufficient. It is outrageous for a Government who say that education is at the top of their agenda to be spending more in the coming financial year on income tax cuts than on extra resources for our schools.
I have visited primary and secondary schools since the Budget asking how they look on the extra cheque that they have received from the Secretary of State for Education and Employment. Of course they welcome any extra funding—who would not?—but that money is filling the deficits that they have run up. It is not providing any new resources such as more books and teachers. That is not the sort of investment that people expected the Government to provide. It is no wonder that class sizes are going up.
The Government talk about reductions in class sizes for five to seven-year-olds, but the average class size in secondary schools is now higher than at any time in the past 20 years—failing education. We find that schools are having problems recruiting teachers and that the number of teacher vacancies has risen by 15 per cent. since last year-47 per cent. higher than in 1997. Are the Government happy with that? Why are they not putting resources into that key area?
In a survey by The Times Educational Supplement in January, seven out of 10 parents said that they were prepared to see income tax increase in order to fund improvements in schools. The people—the electorate—are saying to the Government that they have their priorities wrong in putting income tax cuts above the future of our children.
The second reason why we are against the income tax cut in the clause is that it constitutes irresponsible economic management. On Budget day and in the Red Book, the Chancellor tried to pretend that he was not giving so much to public services and that there was not any extra money. He was trying to massage the figures so that they appeared lower by making them opaque. Although an extra £9 billion-worth of public spending is planned not for this coming financial year, but for the year after, the Chancellor was not happy to announce it. Why? The real reason why he was not prepared to sing the


praises of the ability to find that extra money—we believe that it was an achievement—is that he was worried about how the markets would react to greater public expenditure.
The markets are of course right to be worried about a loosening of fiscal policy represented by public expenditure increases that are not covered by taxation. That is why income tax plays a crucial role in managing the economy. If, as we believe, vital investments are needed in our schools, colleges and universities, and if that is constrained by the markets' perception of the management of the economy—the fear that fiscal policy is becoming too loose—it is surely right not to cut income tax in such an economic climate. One must ensure that the extra expenditure to be directed into our schools will be covered by taxation. It is a political and economic choice, which the Government are failing to make.
The third reason why we are against the income tax cut is that we believe that the Government are being dishonest about taxation. In fact, they have raised the tax burden substantially in this Parliament, but it is pointless to look for changes in the personal tax system to see where that increase has occurred. There has been no open, honest, up-front approach to raising taxes. The Government have found 101 wheezes, through indirect and corporation taxes, to hide the increases in the tax burden. That is plain dishonest.
The Government ought to be making the political case for extra investment in our public services. They should not rely on stealth taxes, as the Conservatives are right, in part, to criticise the Government for doing. We believe that that devalues the vocabulary of politics, and that the Government should be more honest and use the income tax system to achieve their objective.

Mr. Nigel Beard: I thank the hon. Gentleman for giving way. He says that more tax should be raised for public services. How much more? The Liberal Democrats always make the case for raising expenditure, but what is the limit? It seems to be an indefinite amount.

Mr. Davey: The hon. Gentleman seems not to have seen the alternative Budgets that we publish every year. They set out our public expenditure plans in detail, covered by taxation. Of course, there is a limit on the amount of tax that can be taken from our electors.

Mr. Beard: What is the limit?

Mr. Davey: In each year, the amount will be different. That follows the logic of my argument.

Mr. Beard: What is the amount this year?

Mr. Davey: We published our alternative Budget this year, in which we stated that we would not go ahead with the 1p cut that is the subject of the clause, and that we would direct the resources into education, which would have meant up to £3 billion more going into education than the hon. Gentleman's Government are putting into our schools, colleges and universities. He should come over to our point of view, if he believes that education should be the top priority.
The second reason why we oppose the Government's income tax strategy is that they are making the system far too complicated. The complexity that they are introducing has a real cost. In the business sector, the compliance costs are going sky-high, particularly for small businesses. In the personal income tax system, the costs, which are more difficult to measure, are high on individuals.
It appears from the clause that the income tax system is not particularly complicated. Three income tax rates are set out, which look relatively simple. However, when one takes into account the various income tax changes that the Government are making, one finds that there are six effective direct tax rates in the tax system. There is a 10 per cent. effective tax rate, a 20 per cent. rate, a 33 per cent. rate, a 23 per cent. rate, a 46.66 per cent. effective tax rate and a 40 per cent. tax rate.

Mr. John Burnett: Let us not start on capital gains tax.

Mr. Davey: My hon. Friend is wise to say that, as the rates are even more complicated. Just in terms of income tax, the Government have made the tax system far too complicated. Many people—small businesses, representatives of pensioner groups, the various tax professional bodies—are perturbed by what is going on. They see the tax system as an asset of this country, and realise that it needs to be managed carefully. By making it more complicated, one reduces and devalues the asset. In an era of self-assessment, when we should be moving in the opposite direction, the Government are making a huge error by complicating the tax system.
4.45 pm
First, the Government should reduce the number of rates. They could start by cutting the 10p rate to 0 per cent., paying for it with a higher rate on incomes above £100,000. People on those higher incomes can afford the professional advisers to assist them in filling out the forms, but pensioners and others on lower incomes cannot. If the Government want complexity, better that it should be at the higher than at the lower end. That would mean that we could simplify the Finance Bill by doing away with clause 32, which introduces a l0p rate on income from savings.
The Government could also look again at a proposal that I made during the Report stage of last year's Finance Bill to help pensioners with no income tax liability who, under current legislation, are required to fill out self-assessment forms. Thousands of pensioners who are not liable to income tax have to worry about tax returns and the Government have to pay for the bureaucracy. It is ludicrous that the Government should be making the tax system more complicated.
The Government should also push ahead with some of the reforms contained in the Taylor report which the Government rightly commissioned in their first year in office. That report considers how to integrate national insurance contributions with the income tax system. However, the Government have implemented only some of the reforms suggested by Mr. Taylor and his colleagues.

Mr. John Bercow: The hon. Gentleman is right to inveigh against the Government for the tax


system's increased complexity, but I hope that he will not use that as a cloak to advocate higher income and other tax rates, given that the Liberal Democrats' notion that a 1p increase in the basic rate of income tax as the means by which to finance all their spending commitments has been comprehensively discredited. By how much does the hon. Gentleman believe that the top rate should be raised, and what overall increase does he propose in the already burdensome level of business taxation?

Mr. Davey: I am rather surprised by the hon. Gentleman's intervention. He usually follows what is said with great care and does his homework with respect to other party's policies, but in this case he has failed to do so. I just mentioned that we advocated a 50 per cent. rate on incomes above £100,000, and I told the hon. Member for Bexleyheath and Crayford (Mr. Beard) that, before the Chancellor's Budget, we published an alternative budget detailing all our tax proposals. The hon. Gentleman should pay more attention.
If the Government want to tackle the problems of complexity, they should consider some of the proposals from bodies such as the Institute of Chartered Accountants, which asks that some principles should underlie the direction of income tax and personal tax policy more generally. Its recent document contains 10 tenets and argues for a code of fiscal simplicity, perhaps to go alongside the Government's welcome code for fiscal stability, setting some real objectives to ensure that, year on year, the overall tax system is made more comprehensible for the ordinary personal taxpayer and the compliance costs for the personal sector are reduced.

Mr. Burnett: Liberal Democrats will doubtless praise parts of the Finance Bill. On the whole, we are pleased to see the advent of the tonnage tax. But is my hon. Friend surprised that the Finance Bill has 44 pages on the introduction of the tonnage tax?

Mr. Davey: My hon. Friend makes a good point. We debated that matter at some length on Second Reading. The Bill is littered with extra complexities. My point on clause 31 is that the Government are not reducing the complexity of the income tax system. They promised simplicity, but they have failed to deliver that.
I shall outline my final reason for our opposition to the clause. The Government have argued long and hard, before and after the general election, that they believe in social justice. They argue that their reforms of the tax and social security systems are meant to promote social justice. Yet clause 31 provides for a tax cut, which will benefit the richest 20 per cent. of our population fifty times more than the poorest 20 per cent.
A 1p cut in income tax gives far more to the wealthiest in our society. Perhaps it would be more acceptable if the Government had accompanied it with some sort of package to help the poorest pensioners and those who are less well off. However, the cut is accompanied by an increase of 75p a week in the basic state pension. It is therefore not surprising that pensioners throughout the country are incredibly dissatisfied with the Government. They do not believe that the Government are fulfilling the promises that they made to pensioners at the last election.

Mr. Bill Rammell: To clarify matters, will the hon. Gentleman remind us of the Liberal Democrat

commitment in the party's general election manifesto on raising the basic pension? Was not it to increase the basic pension in line with prices—that is, by 75p a week?

Mr. Davey: Again, I am surprised that hon. Members have not read our most recent publication, which is our alternative Budget. The proposals in the current Finance Bill were not in the Labour party's manifesto; all our current proposals did not appear in our manifesto. Time moves on. I am more than happy to take on the hon. Member for Harlow (Mr. Rammell) about that subject. Liberal Democrat Members and our colleagues on these Benches are determined to push the case for pensioners and for an increase in the basic state pension that is far greater than a measly 75p a week. Large increases should be made in the pensions of the most elderly people, the over-75s and the over-80s. We should target resources at the most elderly people, who need our support.

Mr. Rammell: Will the hon. Gentleman give way on that point?

Mr. Davey: No, I shall not. Let us consider the wider community. The Government claim that the lop tax rate, which the clause reaffirms, somehow helps the lowest paid. Yet every independent commentator, from the Institute for Fiscal Studies to the Institute of Chartered Accountants, can readily show anyone who is able to do basic arithmetic that cutting the 10p rate to 0 per cent. and setting a larger personal income tax allowance directs far more resources at the lowest paid.
Again, the Government make a political mistake. They take the rhetoric of the Conservative party and play a political game with our income tax system. If they were more interested in social justice, they would focus resources, not rhetoric, on the lowest paid.

Mr. Bercow: Despite the hon. Gentleman's rude remarks about me, I always enjoy listening to his speeches. A few moments ago, he said that relatively well-off wage earners had access and a desire to use accountants' services to minimise their tax burden. What assessment has he made of the likely use of those accounting services as a result of the proposed introduction of his 50 per cent. top rate, which would damage the tax take? While he deals with that point, will he confirm that because he believes that any cut in the basic rate of tax always disproportionately benefits higher wage earners, regardless of the basic rate of tax, he would always oppose any reduction in it?

Mr. Davey: It has never been the Liberal Democrats' position to oppose any reduction in income tax. The key issue that we must debate as politicians is the balance between tax and expenditure and whether we believe that the people we represent have the services that they want. If the hon. Gentleman asked his constituents who use the health service and the state education system, and have to rely on the police services and the emergency services whether they were satisfied with public services, the answer would probably be no.
We need to invest in the public services to achieve the quality that exists in some of our continental neighbour countries and other parts of the western world. There is appalling underinvestment in some of our public services. Public servants are trying their very best to provide


quality services and, because the previous Conservative Administration and the Government have failed to make that investment, my party favours putting investment ahead of tax cuts.

Mr. Bercow: Raising taxes.

Mr. Davey: We would not proceed with the cut from 23 to 22 per cent. under the clause. I do not think that I could make that clearer for the hon. Gentleman. He also mentioned the accountancy profession. It advocates some of our policies, which would make the tax system far simpler. If they could be implemented, the relatively few taxpayers who would have to face the 50p rate that we propose would not present a problem.
Liberal Democrats reject the clause. We ask the Government to reconsider their income tax strategy and introduce proposals that would deal with the issues that we have discussed this evening: the need to ensure that investment in public services is put ahead of tax cuts; the need to make our tax system more comprehensible, simple and easy to use for the average citizen in an age of self-assessment; and to produce an income tax system that promotes social justice.

Mr. Andrew Welsh: I agree with much of what the hon. Member for Kingston and Surbiton (Mr. Davey) says on a better general approach to fairer taxation and a proper rate of public investment. The debate is about three issues: the Government's approach to taxation and our tax structure in general, the proposed income tax rates and the balance between tax rates and public spending.
On the tax structure, there is little doubt that there has been a shift towards indirect taxation by the Government. According to research from the Institute for Fiscal Studies, more than 40 per cent. of the changes in the Chancellor's previous Budgets were made to indirect taxation. As hon. Members will know, indirect taxation is regressive; it hits those on lower incomes disproportionately harder. What the Chancellor gives with one hand—for example, the welcome increase in child benefit—he takes away with the other in indirect taxes.
The Government should pay particular heed to another element of the IFS report, which showed that changes in indirect taxation have had the most pronounced effect on those in lower income groups. The lowest income decile has lost almost 2.5 per cent. of its net income, compared with a 0.7 per cent. reduction for those in the highest income group.
The Scottish National party asks the Chancellor to consider reversing the trend of holding a Dutch auction on income tax funded by stealth tax hikes towards making the tax structure fairer and more transparent. The SNP recognises the need for a clear strategic shift of the tax burden from indirect to direct taxation methods. Such a review is necessary to consider new ways in which to promote transparency, accountability and simplicity in the tax system.
The Bill continues a dishonest tax policy, which was largely introduced by the Conservative party, but, like so much else, is now enthusiastically embraced by new Labour. The Government are trying to deceive taxpayers with a 1p cut in the basic rate of income tax on one hand and billions of pounds of invisible, indirect taxes on the

other. However, I am happy to report that recent by-election results show that, in Scotland at least, the voters are becoming wise to that trick. In Hamilton and Ayr, they made it clear that the time has come for Labour to start delivering its election promises and that they are frustrated by the Government's failure adequately to address the core issues—health, education and poverty. The message, which I pass on to the Government, is that spin is not enough; substance is required.
The people of Scotland are making it clear that their priorities are for new resources for our public services, which have suffered from more than 20 years of under-investment. We in the SNP have nailed our colours firmly to the mast of fair taxes and real investment in vital public services. Today, I simply repeat our opposition to the needless cut in the basic rate of income tax proposed in the clause.
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Our public services are still in need of substantial investment, and, although the spending increases announced in the Budget were welcomed by the SNP, they are insufficient to deal effectively with the significant problems affecting our crumbling schools, hospitals and infrastructure. The additional spending must be seen against a backdrop of spending cuts in the first three years of this Labour Government.
Health spending in Scotland is due to increase by £173 million next year, but let me put that in context. Scottish hospitals are expected to be £50 million in deficit by the end of the current financial year, and nearly all trusts are expected to miss their waiting-list targets for this year. The Government's higher-than-inflation pay rises must be found from already stretched NHS budgets at a cost of some £449 million a year, which means that the additional money will just about allow the health service in Scotland to stand still, never mind move forward and provide improved services. In fact, it was reported today that Scotland's only heart transplant unit may be forced to close.
According to the Secretary of State for Scotland, Scotland will receive £86.6 million of the additional £1 billion announced for education next year. That should be seen in the context of the cuts that Labour has imposed at local authority level. Next year, local authority education funding will be £540 million lower than it was even in the last year of the Conservative Government. All that stems from the Government's taxation philosophy, and the policies that they are imposing. Any increases in education spending will be swallowed by cuts already imposed on our schools.
A total of £15.9 million is being allocated to Scotland's transport. That, too, must be seen against a backdrop of cuts in the transport budget, which next year will have £100 million less than it had in the last year of the Conservative Government. Scotland's road infrastructure clearly needs more investment. For example, full implementation of the strategic roads review in Scotland would cost £800 million a year, and the much-needed rail link between the Scottish borders and Edinburgh would cost £30 million.
In short, this is not a time for tax cuts. Spending in Scotland as a percentage of gross domestic product is even lower than when the Conservatives were in government. That is not what those who voted Labour in


Scotland expected, but that is what has been delivered. Our pensioners must make do with a pathetic 75p increase in state pensions, and local authority budgets are being slashed year after year. The Government are pursuing a Tory tax-cutting agenda, at the expense of our nation's public services.
What is required is a longer-term strategy much more suited to Scotland's actual needs, and built on a fairer, more open, accountable tax system—something that this new Labour Government, and the Budget in particular, do not deliver. There will be a cost to the Labour party in future years.

Mr. Richard Ottaway: There could be no clearer contrast between the approaches of the Scottish National party and of the Liberal Democrats. Although I did not agree with a word of what was said by the hon. Member for Angus (Mr. Welsh), at least I was clear about what he stood for. However, when the hon. Member for Kingston and Surbiton (Mr. Davey) was asked what I considered a perfectly clear question—how much more would the Liberal Democrats like to be done in terms of public expenditure and taxation?—we were given no clear answer. The hon. Gentleman said repeatedly that we should know about that, because it was in Liberal Democrat manifestos and other publications. I must confess that I have never seen a Liberal Democrat Budget proposal, a Liberal Democrat manifesto or a Liberal Democrat policy document. Perhaps the Liberal Democrats will include me in their distribution lists in future, so that I have some idea of what they are talking about.

Mr. Edward Davey: The Liberal Democrats publish their alternative Budgets at press conferences, which are often attended by a gentleman from Conservative central office. Can the hon. Gentleman tell us when, during the present Parliament, the Conservative party has published its tax and spending proposals as the Liberal Democrats have, and what spending cuts the Conservatives propose to meet their tax guarantee?

Mr. Ottaway: We have not published a tax and spending programme. We will do so before the next election, but one thing is for sure: we will campaign on a tax-cutting agenda because, if a party has the will and commitment to cut taxes, it can do so. That is what will differentiate the Conservative party from the other three parties that are represented here today.

Mr. Davey: Which of the public expenditures will the Conservative party cut to pay for those tax cuts?

Mr. Ottaway: First, I do not accept that we have to cut spending to cut tax. Secondly, we will let the hon. Gentleman know in due course and with absolute clarity exactly what our plans are. He said that the Conservative party was obsessed with tax cuts. Frankly, it is a worthy objective to reduce taxation.

Mr. Beard: Why is tax cutting such a worthy objective if it puts in jeopardy the national health service and state education for the coming generations?

Mr. Ottaway: I do not accept that we have to reduce expenditure on the health and education services to cut

taxes. It is a worthy objective because Britain lives in a competitive world and, as we will find out in the next debate on IR35, it is Britain's competitive position that creates the prosperity that pays for the health service and education.

Mr. Beard: When the hon. Gentleman's party was in government, it pursued an economic policy of competing internationally on the lowest costs. The present Government's policy is to compete through high added value and a highly skilled population, which demands high spending on education.

Mr. Ottaway: I do not quarrel with that, but I do quarrel with the hon. Gentleman's assumption that the previous Government worked on the lowest possible cost. That is not true and he does not have the evidence to prove it.
Basically, at heart, those who oppose the clause want the Government to tax more and to spend more. That is the clear position of both parties. The hon. Member for Angus accused the Government of engaging in a Tory tax-cutting agenda. Nothing could be further from the truth.
The Committee would benefit from examples of tax-raising measures since May 1997. In the July 1997 Budget, mortgage tax relief was restricted to 10 per cent., stamp duty was increased for property transactions of more than £250,000 and payable tax credits on dividends were abolished. It introduced the windfall tax, abolished relief for private health insurance for the over-60s, increased road fuel duties by 6 per cent. in real terms, and tobacco duties by 5 per cent. in real terms.
The 1998 Budget abolished advance corporation tax and introduced the quarterly payment of corporation tax, restricted the married couple's allowance to 10 per cent. from April 1999, increased stamp duty again for property transactions of more than £250,000, increased tobacco duties by 5 per cent., and road fuel duties by 6 per cent. and advanced the date of the road fuel duty increases.
The 1999 Budget abolished the married couple's allowance for the under-65s from April 2000, abolished mortgage tax relief, increased insurance premium tax from 4 to 5 per cent., increased stamp duty for property transactions of more than £250,000, increased tobacco duties by 5 per cent., and road fuel duties by 6 per cent. It advanced the date of the tobacco and fuel duty increases, extended employers' national insurance contributions to all taxable benefits in kind from April 2000 and increased company car taxation.
This year's Budget increased tobacco duties by 5 per cent. in real terms, increased stamp duty on property transactions over £250,000, introduced the aggregates tax from April 2002 and increased tax on wine by more than the rate of inflation. There have been no fewer than 26 tax increases since the 1997 general election, so the next time that Labour Members start hollering about 22 tax increases—most of which are fabrications—under the previous Government, I suggest that they take a close look at my list and the 26 tax increases over the past three years.

Mr. Geraint Davies: Will the hon. Gentleman give way?

Mr. Ottaway: No—[Interruption.] I did not catch what the hon. Gentleman said.

Mr. Davies: I thought as much.

The Second Deputy Chairman: Order. The hon. Member for Croydon, Central (Mr. Davies) has only just entered the Chamber. I remind the hon. Member for Croydon, South (Mr. Ottaway), who has just given us a long list of different kinds of tax, that the debate is specifically about income tax.

Mr. Ottaway: I am pointing out that the Government can reduce income tax by 1 per cent. only because they have imposed 26 other tax increases. I did not give way to the hon. Member for Croydon, Central (Mr. Davies) first, because he has only just entered the Chamber and secondly, because every time I have given way to him, what he has said has been total and absolute rubbish, so it is not worth giving way to him.

Mr. Davies: You are a small man.

Mr. Ottaway: I am a bigger man than you.

The Second Deputy Chairman: Order. Perhaps we might continue in a slightly more sensible way and address the important matter before the Committee.

Mr. Ottaway: Of course I bow to your wishes, Mr. Lord.
The list of taxes that I have just read out provides transparency in respect of the 1 per cent. reduction in income tax. The Liberal Democrats and the SNP have got what they wanted. They have got tax increases and increased expenditure, so it is nonsense for them to oppose the clause. For the same reason, we shall not oppose it tonight.

The Paymaster General: In responding to this brief debate, let me turn first to the comments of the hon. Member for Kingston and Surbiton (Mr. Davey). I was not surprised that the hon. Gentleman does not agree with the Government as, presumably, if he did agree with us, he would be on the Government side of the Chamber, changing things, instead of sitting on the Opposition side of the Chamber, dreaming of irrelevancies.
The hon. Gentleman went on about complexity and fairness, so I would remind him of a few points. He talked about complexity causing problems with the system and about self-assessment. Only 9 million out of 28 million taxpayers pay through the self-assessment system. He was not suggesting that everybody should complete a self-assessment form and he recognises that most people do not. He then complained about the complexity of the system and proposed that we should introduce a 50p rate of tax for income over £100,000 and that that would fund a zero-rated band rather than the 10 per cent. band in the clause.
The Liberal Democrats and the hon. Gentleman who spoke on their behalf cannot complain about complexity and say that the tax system confuses people and then make such a proposal. It is difficult to see how a new rate of tax in addition to a personal allowance would make the system easier to understand.
The hon. Gentleman then said that, if the 1p reduction were part of a package of measures in respect of fairness and help to the low-paid, perhaps the Liberal Democrats would take a different view. I shall return to that point.
The hon. Gentleman also said that the system should be fairer for pensioners. As I think that he will know, four out of 10 pensioners are able to pay tax. I think that he will also agree at least on the point that the Government should focus first on the poorest households. The Government's measures are dealing with precisely that point.
5.15 pm
The hon. Gentleman then prayed in aid 10 points on simplification of the tax system, and discussed whether we should have tax exemption certificates particularly for pensioners. We have considered carefully both that idea and the points that have been made. We have also acted on many of those points. However, I do not know how a tax exemption certificate could offer more than is already available. Pensioners who do not have to pay tax on their gross income are already able, when registering a savings account, to receive interest gross. Exemption certificates would seem to require such pensioners not only to have to apply for an exemption, but to supply more information. How would that make the tax system simpler? How would it remove complexity?
I also remind the hon. Gentleman that the changes that the Government introduced in July 1999—taking precisely the type of action that he and other people have advocated—removed 200,000 pensioners from self-assessment.

Mr. Edward Davey: Can the Minister tell the Committee how many pensioners who are not liable for income tax are still being required to fill out income tax self-assessment forms?

Dawn Primarolo: I do not have that precise figure to hand. I am sure the hon. Gentleman did not really expect me to have it, but was simply making a debating point. Although I think that he will find that that information is available, I shall, nevertheless, in the tradition of the House, ensure that he receives it, if he does not already have it.
The hon. Gentleman then said that we need a strategy to help those who are in the lower-income bracket. However, the Government's proposals are part of a package aimed at achieving precisely that objective. The package includes the working families tax credit—which Liberal Democrat Members have opposed and voted against every time the House has considered it—the national minimum wage, and the national insurance reforms.
Additionally, the Government are examining precisely how best to tackle the issue of child poverty. Hence—as will be debated later today—we are introducing the children's tax credit; from next month, increasing the working families tax credit child rate; and developing the new integrated child credit. As the hon. Gentleman will know, because of the changes made in the Government's Budgets to date, by April 2001, 1.2 million children will have been lifted out of poverty.
The hon. Gentleman is therefore trying to focus on a tiny piece of the Government's strategy, simply to repeat Liberal Democrat Members' usual mantra, "Give us 1p."
Then, the hon. Gentleman and the hon. Member for Angus (Mr. Welsh)—whom I shall deal with later, in relation to health and education in Scotland—suggested


that the Government's taxation policy is regressive. The suggestion is ridiculous. Because of our policies, a single-earner family on average earnings with two children will be £2,600 per year better off. A family with one full-time worker will be guaranteed an income of £214 per week—which is more than £11,000 per year. Introduction of the 10p band will halve the marginal tax rate of 2.7 million people who are on low incomes. Moreover, as I said, our measures will lift 1.2 million children out of poverty.
The hon. Member for Kingston and Surbiton then said that it would be better to increase the personal allowance than to introduce the 10p rate. That demonstrates yet again the total confusion of the Liberal Democrats—they tell us that we must not give too much to those on higher incomes, while advancing a policy that would do that. In isolation, increasing the personal allowance would give the biggest cash gain to the highest payers, a point which the hon. Gentleman does not accept.
The hon. Member for Angus presented, if he will forgive me for saying so, the economic strategy of the Scottish National party worked out on the back of a fag packet, revealing yet again that the SNP's approach to taxation is to raise tax without considering the basis on which the economy is moving forward. The hon. Gentleman complains that Scotland does not receive its fair share of expenditure. Spending per head in Scotland is some 22 per cent. higher than in England—well above the United Kingdom average. Spending on health is 24 per cent. higher than in England and spending on education is 28 per cent. higher.
The allocation of extra resources is based on the population and the allocation of resources between England, Wales and Scotland. Spending on health in Scotland is £1,197 per head; in England, the figure is £963. Spending on education in Scotland is £840 per head; in England, the figure is £636. So for the SNP to advance the argument that somehow Scotland is getting a bad deal from the Union is typically fanciful and untrue.

Mr. Welsh: What is spent per head of population is only one way of measuring public spending. The Minister is continuing an old Tory tradition—Michael Forsyth tried the same game, but when he investigated it further, he found out that, when looked at in the round, spending worked out basically the same.
Under-investment in the health service over decades has led to a massive problem in Scotland. Health trusts are running at a deficit, there are cuts and closures, and local government is again underfunded this year. What the Minister says may sound clever in this Chamber, but it will not sound so clever on the doorsteps when she and her colleagues have to face the electorate who are dealing with the effects of her policies.

Dawn Primarolo: I agree with the hon. Gentleman that 18 years of Tory Government left our health, education and public services with massive under-investment. The scale of the task that the Government face in reversing that is truly phenomenal. The economic policies pursued by this Government are turning the tide.
The Budget gives an immediate boost of £1 billion to education, and an increase of £2 billion in national health service spending. Health spending is to increase by more than 50 per cent. over the five years from the beginning of the comprehensive spending review, from £45 billion in 1998–99 to £69 billion in 2003–04. if the hon. Gentleman is saying there is still a long way to go, Labour Members agree with him, but, instead of undermining our economic policy, he should be considering its elements and how to ensure investment in public services and economic prosperity.

Mr. Welsh: rose—

Dawn Primarolo: I am coming to the end of my remarks, and I have dealt with the hon. Gentleman's points, so I hope that he will forgive me for not giving way again. This is supposed to be a debate about clause 31.
The clause imposes income tax for the year 2000–01. It sets the rates for income tax at 10 per cent. for the starting rate, 22 per cent. for the basic rate and 40 per cent. for the higher rate. It implements the commitment of my right hon. Friend the Chancellor in his 1999 Budget to cut the basic rate of income tax by 1p. We have introduced a range of measures to make work pay better and to encourage people into work. We have cut the basic rate, benefiting 24 million taxpayers. The provision implements the measures already in place to help those on low incomes, such as the starting rate for income tax, national insurance, the working families tax credit and the national minimum wage. Cutting the basic rate cuts the marginal tax rate for the majority of employees. The introduction of the 10 per cent. starting rate halves the marginal rate for 2.7 million people.
Of course we are not cutting taxes at the expense of public services, as both the hon. Members for Angus and for Kingston and Surbiton suggested. My right hon. Friend the Chancellor announced in his Budget the largest-ever increase in national health service resources. We are providing for a 35 per cent. real-terms increase in national health service spending over the five years from the beginning of the first comprehensive spending review, including the additional £2 billion for this year. On top of all of that, this Government are spending £7 billion per year extra on support for children—to lift children out of poverty by 2001.
This is a Government who keep their promises, who have an economic strategy, and who can balance economic fairness, growth in prosperity and investment in public services. This is a Government who cannot be challenged on those points by Opposition Members. I commend the clause to the Committee.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 267 Noes 26.

Division No. 176]
[5.26 pm


AYES


Adams, Mrs Irene (Paisley N)
Barnes, Harry


Ainger, Nick
Bayley, Hugh


Ainsworth, Robert (Cov'try NE)
Beard, Nigel


Alexander, Douglas
Beckett, Rt Hon Mrs Margaret


Allen, Graham
Bell, Martin (Tatton)


Anderson, Donald (Swansea E)
Benn, Hilary (Leeds C)


Atherton, Ms Candy
Benn, Rt Hon Tony (Chesterfield)


Austin, John
Bennett, Andrew F





Benton, Joe
Gardiner, Barry


Bermingham, Gerald
George, Bruce (Walsall S)


Berry, Roger
Gerrard, Neil


Best, Harold
Gibson, Dr Ian


Blackman, Liz
Godman, Dr Norman A


Blair, Rt Hon Tony
Godsiff, Roger


Blears, Ms Hazel
Goggins, Paul


Blunkett, Rt Hon David
Golding, Mrs Llin


Borrow, David
Gordon, Mrs Eileen


Bradley, Keith (Withington)
Griffiths, Nigel (Edinburgh S)


Bradshaw, Ben
Grocott, Bruce


Brinton, Mrs Helen
Grogan, John


Brown, Rt Hon Gordon (Dunfermline E)
Gunnell, John



Hamilton, Fabian (Leeds NE)


Brown, Rt Hon Nick (Newcastle E)
Hanson, David


Brown, Russell (Dumfries)
Harman, Rt Hon Ms Harriet


Browne, Desmond
Heal, Mrs Sylvia


Butler, Mrs Christine
Healey, John


Byers, Rt Hon Stephen
Henderson, Ivan (Harwich)


Campbell, Mrs Anne (C'bridge)
Hepburn, Stephen


Campbell, Ronnie (Blyth V)
Hill, Keith


Campbell-Savours, Dale
Hinchliffe, David


Cann, Jamie
Hodge, Ms Margaret


Caplin, Ivor
Hood, Jimmy


Caton, Martin
Hoon, Rt Hon Geoffrey


Cawsey, Ian
Hope, Phil


Chaytor, David
Howells, Dr Kim


Clapham, Michael
Humble, Mrs Joan


Clark, Rt Hon Dr David (S Shields)
Hurst, Alan


Clark, Dr Lynda (Edinburgh Pentlands)
Hutton, John



Iddon, Dr Brian


Clarke, Eric (Midlothian)
Jackson, Ms Glenda (Hampstead)


Clarke, Rt Hon Tom (Coatbridge)
Johnson, Alan (Hull W & Hessle)


Clarke, Tony (Northampton S)
Johnson, Miss Melanie (Welwyn Hatfield)


Clelland, David


Clwyd, Ann
Jones, Rt Hon Barry (Alyn)


Coaker, Vernon
Jones, Helen (Warrington N)


Coffey, Ms Ann
Jones, Ms Jenny (Wolverh'ton SW)


Colman, Tony


Connarty, Michael
Jones, Dr Lynne (Selly Oak)


Cooper, Yvette
Jowell, Rt Hon Ms Tessa


Corbett, Robin
Kaufman, Rt Hon Gerald


Corston, Jean
Keen, Alan (Feltham & Heston)


Cranston, Ross
Kelly, Ms Ruth


Crausby, David
Kemp, Fraser


Cryer, Mrs Ann (Keighley)
Khabra, Piara S


Cryer, John (Hornchurch)
Kilfoyle, Peter


Cummings, John
King, Ms Oona (Bethnal Green)


Cunningham, Jim (Cov'try S)
Ladyman, Dr Stephen


Dalyell, Tam
Lawrence, Mrs Jackie


Darling, Rt Hon Alistair
Lepper, David


Davey, Valerie (Bristol W)
Levitt, Tom


Davidson, Ian
Lewis, Ivan (Bury S)


Davies, Rt Hon Denzil (Llanelli)
Liddell, Rt Hon Mrs Helen


Davies, Geraint (Croydon C)
Lloyd, Tony (Manchester C)


Dawson, Hilton
Love, Andrew


Dean, Mrs Janet
McAvoy, Thomas


Denham, John
McCafferty, Ms Chris


Dobbin, Jim
McDonagh, Siobhain


Donaldson, Jeffrey
Macdonald, Calum


Donohoe, Brian H
McDonnell, John


Doran, Frank
McFall, John


Dowd, Jim
McGuire, Mrs Anne


Drew, David
McIsaac, Shona


Dunwoody, Mrs Gwyneth
McKenna, Mrs Rosemary


Eagle, Maria (L 'pool Garston)
Mackinlay, Andrew


Edwards, Huw
McNamara, Kevin


Ellman, Mrs Louise
Mactaggart, Fiona


Field, Rt Hon Frank
McWalter, Tony


Fisher, Mark
McWilliam, John


Fitzpatrick, Jim
Mahon, Mrs Alice


Fitzsimons, Lorna
Marsden, Gordon (Blackpool S)


Flint, Caroline
Marsden, Paul (Shrewsbury)


Flynn, Paul
Marshall, Jim (Leicester S)


Foster, Rt Hon Derek
Meacher, Rt Hon Michael


Foster, Michael Jabez (Hastings)
Michael, Rt Hon Alun




Michie, Bill (Shef'ld Heeley)
Sawford, Phil


Milburn, Rt Hon Alan
Sedgemore, Brian


Miller, Andrew
Sheerman, Barry


Moffatt, Laura
Sheldon, Rt Hon Robert


Moonie, Dr Lewis
Simpson, Alan (Nottingham S)


Moran, Ms Margaret
Skinner, Dennis


Morgan, Ms Julie (Cardiff N)
Smith, Rt Hon Andrew (Oxford E)


Morley, Elliot
Smith, Miss Geraldine (Morecambe & Lunesdale)


Mullin, Chris


Murphy, Denis (Wansbeck)
Smith, Jacqui (Redditch)


Murphy, Jim (Eastwood)
Smith, John (Glamorgan)


Naysmith, Dr Doug
Smith, Llew (Blaenau Gwent)


Norris, Dan
Snape, Peter


O'Brien, Bill (Normanton)
Soley, Clive


O'Hara, Eddie
Spellar, John


Olner, Bill
Squire, Ms Rachel


O'Neill, Martin
Steinberg, Gerry


Organ, Mrs Diana
Stevenson, George


Osborne, Ms Sandra
Stewart, David (Inverness E)


Palmer, Dr Nick
Stewart, Ian (Eccles)


Pearson, Ian
Stoate, Dr Howard


Perham, Ms Linda
Strang, Rt Hon Dr Gavin


Pickthall, Colin
Stuart, Ms Gisela


Pike, Peter L
Taylor, Rt Hon Mrs Ann (Dewsbury)


Plaskitt, James
Taylor, David (NW Leics)


Pollard, Kerry
Temple-Morris, Peter


Pond, Chris
Thomas, Gareth (Clwyd W)


Pound, Stephen
Tipping, Paddy


Powell, Sir Raymond
Todd Mark


Prentice, Ms Bridget (Lewisham E)
Touhig, Don


Prentice, Gordon (Pendle)
Trickett Jon


Prescott, Rt Hon John
Truswell, Paul


Primarolo, Dawn
Turner, Dennis (Wolverh'ton SE)


Prosser, Gwyn
Turner, Dr Desmond (Kemptown)


Purchase, Ken
Turner, Dr George (NW Norfolk)


Quin, Rt Hon Ms Joyce
Turner, Neil (Wigan)


Radice, Rt Hon Giles
Twigg, Derek (Halton)


Rammell, Bill
Tynan, Bill


Rapson, Syd
Vis, Dr Rudi


Raynsford, Nick
Ward, Ms Claire


Reed, Andrew (Loughborough)
Wicks, Malcolm


Reid, Rt Hon Dr John (Hamilton N)
Williams, Rt Hon Alan (Swansea W)


Robinson, Geoffrey (Cov'try NW)


Robinson, Peter (Belfast E)
Williams, Mrs Betty (Conwy)


Roche, Mrs Barbara
Wilson, Brian


Rooker, Rt Hon Jeff
Winnick, David


Ross, Ernie (Dundee W)
Wood, Mike


Rowlands, Ted
Worthington, Tony


Roy, Frank
Wray, James


Ruane, Chris
Wright, Dr Tony (Cannock)


Ruddock, Joan


Ryan, Ms Joan
Tellers for the Ayes:


Sarwar, Mohammad
Mr. Kevin Hughes and


Savidge, Malcolm
Mr. Mike Hall.



NOES


Allan, Richard
Livsey, Richard


Ashdown, Rt Hon Paddy
Llwyd, Elfyn


Ballard, Jackie
Maclennan, Rt Hon Robert


Berth, Rt Hon A J
Michie, Mrs Ray (Argyll & Bute)


Brand, Dr Peter
Moore, Michael


Breed, Colin
Taylor, Matthew (Truro)


Bruce, Malcolm (Gordon)
Tonge, Dr Jenny


Burnett, John
Tyler, Paul


Burstow, Paul
Webb, Steve


Cable, Dr Vincent
Wigley, Rt Hon Dafydd


Davey, Edward (Kingston)
Willis, Phil


Foster, Don (Bath)


Harvey, Nick
Tellers for the Noes:


Keetch, Paul
Sir Robert Smith and


Kirkwood, Archy
Mr. Bob Russell.

Question accordingly agreed to.

Clause 31 ordered to stand part of the Bill.

Clause 59

PROVISION OF SERVICES THROUGH INTERMEDIARY

Question proposed, That the clause stand part of the Bill.

Mr. Ottaway: This debate is about IR35 and its introduction. The Government entered office in 1997 on the back of a clear general election victory. They had the support of almost every age group, both sexes, the professional classes and, most important, the business sector. In my judgment, the influence of the business sector played a crucial role in the Labour party's victory. The small business man and the self-employed had much to look forward to. After all, the Labour party's business manifesto said:
A new Labour Government will give Britain's entrepreneurs and small businesses the backing they deserve.
What do they get in response? They get IR35.
Not content with raising the burden of taxation on business by £5 billion a year, a £5 billion regulatory burden, a complete revamp of double taxation relief costing billions and imposing national insurance contributions on share options, the Government now want to clobber the heart of Britain's high-tech industry with IR35 at a cost of £900 million a year, which is a heck of a lot for Britain's self-employed to pay.

Mr. Michael Fabricant: My hon. Friend is perhaps falling into the trap of at least giving credence to the idea that it was the Labour Government's idea to introduce IR35. Is he aware that the Treasury suggested that IR35, or its equivalent, be introduced in the early 1980s, in the late 1980s and then the early 1990s, but the idea was rejected three times by Conservative Chancellors of the Exchequer? They knew the effect that it would have on high-technology companies in the United Kingdom.

Mr. Ottaway: My hon. Friend is right. We opposed IR35 because of its impact on the flexibility and operations of labour markets, and I shall make that point later.
At least the leopard does not change its spots. In the 1960s, the Labour party nearly brought the economy to its knees and, in the 1970s, it tried to tax the service sector into oblivion. Now in the 1990s, as the high-tech era lifts off, it wants to hit those who make such a large input to the sector's success.
Not content with treating the self-employed with contempt, the Government do it with offence. They accuse Britain's entrepreneurs of "disguised employment" as though they were somehow cheating. The Government fail to recognise that the world is changing. Labour patterns and methods of doing business are changing. Highly skilled staff no longer stay with employers for long periods. We have an increasingly mobile work force and trying to tax them in such a way will inevitably lead to difficulties.
For decades, the self-employed have worked through service intermediaries. They form a business with themselves as its main asset.

Mr. Michael Clapham: Is the hon. Gentleman suggesting that an employee of an intermediary who works for a client and is under the control

of a client and therefore engages as an ordinary employee would engage, should have benefits over and above those available to the employees of the client?

Mr. Ottaway: I am grateful for that intervention. I am certainly not suggesting that and, what is more, it would not be the case. As I shall shortly point out, the self-employed caught by IR35 will still be worse off in terms of the benefits that they receive.
The self-employed work through intermediaries not, as the Government would have us believe, to avoid national insurance contributions, but primarily because it is the most sensible way to arrange their affairs. It helps with the establishment of offices at home, with the purchase of specialised equipment to carry out their job and with travel and accommodation expenses. The Government, with a complete lack of vision, accuse such people as though they were somehow cheating the public. The very opposite is true. Contractors do not get such a good deal; they often do not receive such good benefits as the employed personnel with whom they work.
If I can have the attention of the hon. Member for Barnsley, West and Penistone (Mr. Clapham) for a second, the Inland Revenue has confirmed that, even under IR35 and despite paying class 1 contributions, the self-employed will still not be entitled to rights such as sick pay and holiday pay and, what is worse, they will not be entitled to unemployment benefit when they are not contracted. In short, it is pain without gain.
The national insurance element is being dealt with by delegated legislation shortly to be taken in Committee and against which the Conservative party has prayed in early-day motion 657. The other half of the Government's attack are the rules subjecting intermediaries to schedule E taxation. They are contained in schedule 12 and will be introduced by the clause that we are debating.

Mr. Geraint Davies: Will the hon. Gentleman give way?

Mr. Ottaway: No, I will not.
In simple terms, the rules governing the employed—

Mr. Dale Campbell-Savours: On a point of order, Mr. Martin. We have just heard a remarkable response from the hon. Member for Croydon, South (Mr. Ottaway). In Committee on the Floor of the House, we give way.

The First Deputy Chairman of Ways and Means (Mr. Michael J. Martin): Giving way is—[Interruption.] Perhaps the hon. Member for Workington (Mr. Campbell-Savours) will listen to my response. He might learn something. Giving way is up to the individual Member. It is not for the Chair to decide whether a Member should give way.

Mr. Ottaway: I recognise the courtesies to which the hon. Member for Workington (Mr. Campbell-Savours) refers. I would give way to 658 Members. It happens that in the past the hon. Member for Croydon, Central (Mr. Davies) has intervened with offence. As a result, I will not be giving way to him.
I shall continue with the debate, and the important subject of IR35, which will attack many people.

Mr. Bercow: Will my hon. Friend consider adding to his list of Members to whom he does not intend at any stage to give way the hon. Member for Workington (Mr. Campbell-Savours), who has just had the chutzpah to accuse the Opposition of defending tax dodging? He has therefore subjected 60,000 hard-working IT professionals to a calumny.

The First Deputy Chairman: Order. The hon. Member for Croydon, South (Mr. Ottaway) was doing all right before the interventions.

Mr. Ottaway: I am grateful to my hon. Friend the Member for Buckingham (Mr. Bercow). I would certainly give way to the hon. Member for Workington (Mr. Campbell-Savours). We do not agree with him on this side of the Chamber, but we treat him with respect.
I shall return to IR35. In simple terms, the rules governing the employed and the self-employed are being changed. The self-employed person who looks as though he might be employed will be treated as employed, and will have to pay tax and national insurance contributions as an employee, not as a self-employed person. Expenses incurred in running a business will be taxed as income, and a mere 5 per cent. of turnover will be allowed as a genuine business deduction. That is not taxation of Britain's self-employed; it is discrimination against Britain's upwardly mobile work force. Those who will feel it hardest will be the high-tech sector, which is the sharp end of British industry. They are the people whom Britain can least afford to lose.
I shall quote from the Electronic Telegraph. A software engineer at an aerospace-related corporation preferred to remain anonymous because his contract is not yet completed. When it is, he plans to work with a German partner, or possibly an Italian. He said:
The Government is creating a brain drain like the one that happened in the 60s. Software is a peculiar thing which has produced a good income for Britain and lots of spin-offs but lots of other countries like Germany are not very good at it.
He thinks that they will become good at it,
and so take trade away from Britain, in addition to the tax loss from losing high-income experts.
Another example is Mr. Steven Weaver, who says that he
is ashamed to say that I voted for this business hostile Government…I have no wish to remain in a country that punishes enterprise instead of encouraging it. My company turned down six months' further work in the UK implementing e-commerce systems for our major telecommunications company, entirely because of IR35.
At the general election, Alan McRae was a Labour voter. He said:
I spent three months and about £50,000 of my company money to try to develop a marketable item of hardware. IR35 will stop this kind of enterprise. Under the new rules, I could not afford to work here. My outgoings in travel and living costs will be swallowed up in two months under the 5pc ruling for expenses.
So he moved. In his case, the total take to the Government is now zero.
I shall take another example. Would Laetitia Caster, the model chosen to represent the symbol of the French Republic, La Marianne, have come to the United

Kingdom if she had known about IR35? She almost certainly works through a personal service company, and she ran away from France to avoid 54 per cent. tax, but found that she would have to pay 52.2 per cent. tax here. It comes as no surprise to find that when she arrived and saw what was going on, she quickly announced that she would not be resident in the UK for tax purposes.

Mr. Beard: Can the hon. Gentleman suggest a motive for people to leave full-time employment and set up a personal service company other than tax evasion?

Mr. Ottaway: The hon. Gentleman must consider the complexities of the issue. Many of the self-employed incur expenditure on the tools of their trade, particularly in the high-tech sector when they buy computer equipment. Under the self-employed rules, that expenditure is tax deductible, but under IR35 it is not. Many people therefore prefer to be self-employed so that they can at least count expenditure on the tools of their trade as tax deductible.

Mr. Desmond Swayne: I worked in the industry, and for most people it is not a question of giving up employment because most jobs are project-driven and contract staff are required, so more often than not full-time employment is not an option.

Mr. Ottaway: My hon. Friend is right. As I was saying earlier, we have a mobile work force, and work patterns are changing. Fewer people are employed as regular staff for a long period. Individuals move frequently and are subject to a wide variety of circumstances.

Mr. Beard: I understand the point that people who are employed on a casual basis may have a greater reward than those who are employed on a regular basis, but that should be given in their salary or payment. Why should it be given through the tax system?

Mr. Ottaway: It is not a reward. Any business is entitled to tax deductions for its operations, such as capital allowances for large corporations. The Government are saying that if people are caught by the IR35 rules, their expenditure cannot be tax deductible, particularly if it is more than 5 per cent. That is perfectly straightforward.

Mr. Campbell-Savours: There is one simple point that I cannot understand. Why should people want to relieve themselves of tax liability when the United Kingdom has some of the lowest income taxes in the whole of the developed world? Even the Tories kept telling us that in the last Parliament, and taxes are lower now.

Mr. Ottaway: The hon. Gentleman misunderstands me: people are not trying to relieve themselves of taxes; they simply do not want to be taxed on the turnover of their business.

Mr. Campbell-Savours: Some people say that it is tax evasion.

Mr. Ottaway: It is not evasion; that is illegal.

Mr. Campbell-Savours: It is avoidance.

Mr. Ottaway: Avoidance is a much better word.

Mr. Fabricant: I am grateful to my hon. Friend for giving way because I am conscious that he has faced a barrage of interventions. He mentioned tax relief on the purchase of equipment, but he should also make it clear that if the clause is passed, IR35 will mean that people will be unable to claim tax deductions for expenditure on travel and accommodation when they go out to seek work but are unsuccessful. That is a disincentive to go out and seek work.

Mr. Ottaway: My hon. Friend is right, although he should be careful to note that the Inland Revenue has issued guidelines about what is self-employment and what is employment. As far as I can tell, the old rules are being changed, although how that interacts with case law is not yet apparent. Perhaps we shall explore that in the Standing Committee. The point applies to people who are caught by IR35 because they are considered to be employed.
The Government say that the self-employed have nothing to fear from IR35, but how do we know whether someone is genuinely self-employed? As I said, the Government's guidelines will tell us, but those guidelines are applied by the Inland Revenue, which finds out who is self-employed by checking every single case. That is not means-testing, it is a witch hunt. Every person who thinks that, according to the Government's guidelines, he may be self-employed has the right to ask the Inland Revenue for verification.
The Inland Revenue has let it be known, however, through leaks, that if someone is unsure whether they are self-employed, it will almost certainly tell them that they are employed. That means that a subjective judgment is made by the official considering the case. In two test cases put forward by the Professional Contractors Association, the two people in question were doing the same job, and one was told that he was employed and subject to IR35, and the other was told that he was self-employed and therefore not subject to it.
What sort of encouragement to British industry is that? Someone may invest in equipment only to find that no tax relief is available. The uncertainty will be devastating to the high-tech sector, and it is no wonder that people are up in arms about IR35 and fleeing abroad. It is no wonder that Australia abandoned a similar scheme because of its complexities and the difficulty of introducing it.

Mr. Edward Davey: I have been listening carefully to the hon. Gentleman and agree with almost every word. Does he agree that it is absurd to introduce a system that requires small businesses to check every contract with the Inland Revenue? Is not that bureaucracy gone mad?

Mr. Ottaway: The hon. Gentleman is right. When, only a few weeks ago, the Australians realised how complex their scheme, which was very similar, would be, they abandoned it.
Concerns have been expressed not only by the industry and Members on both sides of the Committee but by the Minister for Small Business and E-Commerce. She went to the United States to try to woo ex-pats back to this country, but considering the chaos that IR35 is about to cause, who in their right mind would want to return? It is not only Conservative Members who are saying that the Paymaster General is wrong, but her fellow Ministers. As usual, however, she refuses to listen.
The good news is that part of the Government have got the message. They announced yesterday that the time taken to process work permit renewals is to be cut to three months to help Britain to compete for overseas specialists in areas such as information technology. The Department for Education and Employment press release said:
The processing time for work permit renewals is to be slashed by up to three months following the introduction of a new renewal system…by the Education and Employment Secretary David Blunkett. The move, together with new measures arising from the work permit review, will particularly help IT employers to address skills shortages.
It continued:
The modernisation measures include: a fast-track work permit route for employers in recognised shortage sectors, such as IT.
The press release's notes to editors said:
Examples of occupations on the fast-track applications route are included in Annex A.
That annexe includes analyst programmers, software engineers, database specialists and IT managers. Part of the Government has got the message that there is a shortage of IT staff. The press release also said:
We are listening to the needs of employers, and we are giving them what they need.
I only hope that the message gets through to the Treasury.

Mr. Davey: Will the hon. Gentleman speculate on whether that is an example of joined-up government or shambolic government?

Mr. Ottaway: It is completely disjointed government. I hope that the Paymaster General will address the issue. Chamber debating banter aside, this is a serious issue because one Department is pushing a programme that is in complete opposition to what the Treasury is doing.
Germany is seeking to recruit IT workers from India. The United States is introducing a high-tech Act, which will come into effect on 1 October. That will allow the US to increase the number of visas for IT consultants coming to the country by 200,000 over three years. I hope that the Paymaster General will get the message that there is a shortage of IT workers around the world. Yet the Treasury, in its obsession about so-called fair taxation, is driving IT specialists out of the country as fast as other Departments are trying to woo them in, and believe me, they have plenty of places to go.
6 pm
We now have a battle between Departments and between nations. We have the case of Mr. Richard Marriott, who says that, although the Government claim to favour small business, they are
pouring weedkiller on the seed-bed of enterprise.
He is a specialist computer consultant and is moving to New Jersey to avoid IR35. Stuart Ranson, a programming consultant, was worried when Labour came to power, but returned from an overseas contract none the less.
Now, they have finally driven me away—
says the programming consultant, now in Holland. He adds:
It was totally as a result of IR35 and the uncertainty. I object to being taxed at 52 per cent. and being called a tax cheat. I cannot save any money in my company for the times when I don't get work


and the 5 per cent. expenses allowance doesn't go anywhere near to covering the cost of hardware, training, accounting and legal expenses.

Dawn Primarolo: Before the hon. Gentleman digs himself into an almighty hole, I thought I might mention that, in the United States of America, IR35 rules are in force: someone earning £55,000 gross will have net earnings of £37,000, but, of course, has to pay health costs. There are also service company rules in the Netherlands: someone earning £55,000 will take home £29,000.

Mr. Ottaway: The hon. Lady thinks that that is a reason to introduce IR35, but that is entirely in opposition to the vision of the Conservatives. If those are the conditions in the Netherlands and the United States, why does she not abandon the measure and so get IT consultants to come here and meet the requirements of the Department for Education and Employment?

Mr. Campbell-Savours: Did the hon. Gentleman already know what my hon. Friend the Paymaster General has just told him?

Mr. Ottaway: I shall be candid: no, I did not. However, the point is that we live in a competitive economy and we have to compete against other countries. It has been recognised that there is a shortage of IT consultants in this country, and we are going to have a problem unless we can attract more of them here. Introducing IR35 is not the way to do that.

Mr. Beard: Is the gist of the hon. Gentleman's case that there is a shortage of computer industry workers, some of whom have gone abroad, so we should try to attract them back by making tax dodging easier?

Mr. Ottaway: I am merely saying that we should leave the tax system as it has been since it was started, not introduce the new measure. That is not to make tax dodging easier.
The Government must reassess their attitude to professional contractors in this country. They do not recognise that the use of freelance contractors provides businesses with skills that are not available in-house. They do not recognise that many contractors became freelances as the result of experiencing redundancy in their middle years and realising that they stood little chance of regaining permanent employment because of changes in working practice and age barriers. They do not realise that a limited company provides the only reasonable way in which to compensate for contractors' lack of job security.
We support the Government in their objective of achieving fair taxation, but a system of taxation must be workable and the Government must be aware of its consequences. However, there are plenty of flaws in the Bill. Let us take the case of a professional musician who plays at a recording session in the morning, does a solo at a memorial service at lunchtime, rehearses in the afternoon with a group of friends with whom he occasionally fulfils engagements, and performs in the evening with his main employer, the orchestra with which he has a regular contract. The system is simply not workable in such cases: is the Revenue going to insist that

four separate contracts apply? For Ministers to defend such a ragbag of nonsense is bare-faced cheek and lacks credibility.
One need only read a little further into the legislation to discover an even bigger nonsense. Paragraph 4 of schedule 12 extends the legislation to partnerships where the worker, as an individual or in combination with relatives, is entitled to 60 per cent. or more of the profits of the partnership. Its definition of relative refers to "husband or wife" and some other relatives. However, paragraph 21(4) states:
For the purposes of this Schedule a man and a woman living together as husband and wife are treated as if they were married to each other.
We have a double first. Hon. Members will have noted that the legislation does not apply, for example, to homosexual couples. We know that the Government are hostile to marriage, but that is the first time that common law relationships between a man and woman have been recognised in the tax system, and the first time that homosexuality has been treated as an exception under legislation. The Government must state whether that is intended or an oversight.
It is clear that the measure has been introduced in a rush. As I said, the Conservative Government rejected it several times as unworkable and liable to erode Britain's competitive position and to destroy labour market flexibility, but the current Government clearly do not have the vision to recognise the implications. IR35 is a turnover tax which creates uncertainty. It is being introduced with minimum consultation, and those representations that were made have been ignored.
We should ask whether it will produce the revenue that the Revenue expects or hopes for. A leading computer specialist, Gurcharanjit Sian, told the Electronic Telegraph:
IR35 will cause the biggest brain drain since the 1970s when Labour taxed the rich until the pips squeak. Because of the large scale emigration, the estimates of extra tax revenue will also be wrong. The amount of tax my business and I paid last year was enough to finance a couple of Minister's salaries with some change left over for servicing a Jaguar. This year the amount of tax I pay will be nil.
His emigration will mean that we lose his e-commerce expertise to another country. In addition, he is recruiting 100 Britons with similar expertise who have been hit by the same rules because they have similar businesses; they will go abroad with him. Mr. Sian adds:
We have no British car industry left due to old Labour. Tomorrow there is a danger we will have no British e-commerce industry left either, due to new Labour.
I conclude with the arguments advanced by Mr. Alan Broke, a former president of the Chartered Institute of Taxation. In last year's Hardman lecture, he suggested:
most complexities come about when politicians depart from the objective of raising enough revenue to cope with their spending and insert measures that have nothing to do with raising revenue but everything to do with trying to engineer social change. All the evidence suggests that tax systems are spectacularly unsuccessful at doing this. However, that does not deter politicians from trying.
I could not have put it better myself.
The legislation is muddled. The measure breaches Labour's manifesto commitments, it is a bureaucratic nightmare, it erodes Britain's competitiveness, it will lead to a brain drain and it will not raise the revenue that the Government hopes for. The Government should delay


implementation to give them time to reconsider the damage they are causing. That is why we shall vote against the clause tonight.

Mr. Edward Davey: I associate the Liberal Democrats with many of the remarks made by the hon. Member for Croydon, South (Mr. Ottaway). We shall vote against the provision because it is extremely pernicious and damaging to British industry's long-term wealth creating sector—the e-commerce sector. The Government came to power saying that they would champion the knowledge economy, and we have heard many speeches and read many publications in which they have said that they want to back the knowledge economy, the IT industry and e-commerce. However, the measure goes in precisely the opposite direction; it is a huge own goal for which our economy will pay dearly if the Government do not take the opportunity to change their mind.
I could recount the saga of the shambles that the Government have created, but I shall not detain the House for too long exploring every detail. When the Chancellor of the Exchequer made the initial announcement in the 1999 Budget, the system was even dafter than the current proposals. We had an accreditation system, which would have placed responsibility on the client in various contractual relationships.
The system was a nightmare and belatedly, in September, the Government were forced to do a U-turn on many of the original proposals. That U-turn was forced on them as a result not only of lobbying by the industry but of hard work, particularly by my hon. Friend the Member for Twickenham (Dr. Cable), whom I congratulate. He worked very hard with Members on both sides of the House in lobbying the Treasury to back down.
Unfortunately, in its announcement of 23 September, the Treasury failed to go far enough. It has helped some groups in the IT industry. It has helped the large companies and larger partnerships which earn millions of pounds a year, but it has not helped the small business or contractor or the sole trader. In failing to help the small business, the Treasury has again misunderstood the nature of the new economy and how the IT sector works.
The IT industry is very competitive and innovative, and relies on the small business—the one, two and three-person business—to generate the drive forward. Technology changes the parameters of the industry every three months; every month, there is a change. One cannot rely on larger companies and partnerships to remain on top of that. One needs the small business and the one-person contractor to provide the innovation and drive behind the new business. In failing to understand that, the Government have shown their ignorance of the way that the economy of this country and of the developed world is going.

Mr. Beard: I am following the hon. Gentleman's argument, but I do not understand why he seems to believe that someone who is employed in a major company in a particular role should be able to leave to set up a personal service company—for all sorts of reasons; perhaps for some of those that have been mentioned—and

enjoy tax or national insurance privileges as a result. Surely the hon. Gentleman is arguing that there should be neutrality on either side of the boundary.

Mr. Davey: The hon. Gentleman raises the issue of whether there is tax avoidance and abuse of the system. I think that all parties agree that some abuse has occurred. The question is how we stamp out that avoidance while allowing genuine contractors to go about their legitimate business and provide the country's wealth. If he looked at some of the correspondence that I have received, he would see that many businesses in my constituency—and, I imagine, in his—will be caught by the proposal. The Government are using a sledge hammer to crack a nut. There is no doubt that they know that but are failing to act. One must question their motives.

Mr. Campbell-Savours: Is it not true that the Liberals' desire to raise the higher rate of tax by 10p would have exactly the same effect?

Mr. Davey: I am more than happy to confirm that that is our policy, because we have just debated it under the previous clause, but it would not by any means have the same impact. [Interruption.] The hon. Gentleman asked me a question; he should have the decency to listen to the answer. Many of the people who are writing to me earn far less than the £100,000 threshold at which the Liberal Democrats want to impose a 50p top tax rate. Many of them earn £30,000 or £40,000. They work in genuine small businesses and have modest incomes. The hon. Gentleman's party want to shove an extra 10 or 20 per cent. tax on to people who are struggling to make a living.

Mr. Fabricant: Are the Government not targeting the very people whom we need in this country—those who are not risk-averse, those who comprise the enterprise culture and those who work in high-tech sunrise industries? They are the very people whom we should not be driving abroad.

Mr. Davey: The hon. Gentleman is absolutely right; I agree with everything that he has said.
If we are to oppose the proposal constructively, we must debate how we would tackle the abuse that we agree has occurred—the "Friday evening, Monday morning" abuse to which the hon. Member for Bexleyheath and Crayford (Mr. Beard) rightly referred. The Liberal Democrats believe that that abuse could be tackled without hitting the legitimate contractor. One could consider past contractual relationships between employees of a personal service company and its main or sole clients; we could target that abuse and hone in on it to stop it. That is the approach that we recommend, but not the one in the schedule that the clause will implement.

Mr. Rammell: Will the hon. Gentleman give way?

Mr. Davey: I shall give way in a second; I wish to make the following key point.
A survey of small contractors by the Professional Contractors Group, which represents the people targeted by the clause, showed that the main client of 4 per cent. of its members is the former employer. So it seems that


not only have the Government overestimated the abuse, but their measure is totally inadequate to capture the people whom they say they want to stop.

Mr. Rammell: I heard the hon. Gentleman say that it would be wrong to criticise the proposition without offering an alternative. I then heard him say that he would hone in on abuse. Will he enlighten the Committee by telling us exactly what he means by that, or was the phrase simply vacuous?

Mr. Davey: I am more than happy to do so; in fact I just did. Before the hon. Gentleman intervened, I talked about the past contractual relationship between an employee of a personal service company and its main or sole client, which constitutes the abuse that the Government said they wanted to tackle. The PCG has come up with more detailed tax proposals that would stop the abuse about which the Government say they are concerned without hitting legitimate business. If the hon. Gentleman is concerned about the people in his constituency who will be hit—they may have voted for him—he should be criticising the Government and asking them to think again, just as in Australia, where the Government proposed a similar provision but realised that it would harm the new economy.
The far east and the Pacific rim are very competitive. Those countries realise that they must retain home-grown, skilled IT workers in order to develop businesses. Fortunately, the Australian Treasurer had the wisdom to back down. When the Australian Government changed their proposals, the Treasurer said:
Originally the proposals aimed to set up a system whereby people who are really employees couldn't pretend that they were contractors and walk out of the PAYE system, but you had to protect genuine contractors who really are in business. And what we are trying to do here—
by the change—
is protect genuine contractors.
That is what our Government should be doing, and that is what we are arguing for.

Mr. Quentin Davies: The hon. Gentleman quoted the figure of 4 per cent. of contractors whose principal customer is a former full-time employer. Does he agree that for many of those contractors, the relationship will have changed at the initiative of the former employer? Those people will have been made redundant. The employer will have decided that he could no longer bear that individual as a fixed cost, but could do so as a variable cost. In other words, the individual who is pushed into being a contractor bears the economic risks of his activity in a way that he previously did not. It is perfectly right and economically rational that such people should be taxed on that basis, as self-employed.

Mr. Davey: Although I agree with the thrust of the hon. Gentleman's point, in opposing the clause we must be careful not to give succour to employers who go down such a route. I agree with some of what the Government say about the Friday evening, Monday morning practice being wrong. Far fewer employers use it than the Government are trying to make out; none the less, we must not give succour to people who behave in such an appalling way. We are against such abuse of the tax

system. We are in favour of a different approach, which does not discriminate against small companies. The Government will be taken to the courts because of this measure, and rightly so. I do not know whether the Conservatives are pleased that it will be under European legislation that the Government are criticised in the courts—

Mr. Bercow: Ends and means.

Mr. Davey: It seems that some on the Conservative Benches want to have their cake and eat it. We will not let them do that.
The Professional Contractors Group will seek a judicial review, because it believes that the Government's proposals represent anti-competitive measures that discriminate against small businesses, which are the bedrock of the economy. The measures favour the big boys, and that must be wrong.

Mr. Bercow: I strongly agree with the hon. Gentleman's comments about discrimination against small firms. Should we not therefore be told by the Paymaster General whether, against all the evidence with which she will have been provided, she believes that the 5 per cent. expenses limit is, on average, adequate to cover accountancy, computer and training costs, or whether she knows perfectly well that it is not adequate, but that she does not care because the figure has been plucked arbitrarily out of the air, as a capricious means by which to raise taxes?

Mr. Davey: The hon. Gentleman is right. The Government must justify the 5 per cent. figure, and I fear that they will be unable to do so. We pointed out to the Paymaster General that the figure does not represent the training cost that must be borne by contractors in the industry. They often find that within six months their skills are obsolete, because the industry changes so much. They will be out of business unless they spend heavily on investment in their skills.
In response to that argument, the Government say that employees must fund their own training costs. The Government clearly fail to see the difference and the issue that we are trying to highlight. A self-employed business man or woman trying to build up his or her business needs to make that investment. In the new economy—the knowledge economy—such an investment in training and knowledge is comparable to an investment in machinery and plant in the old economy. If the Government fail to realise that, they will damage the cornerstone of the country's future wealth.
The discrimination against small companies is of particular concern to Liberal Democrats. The Government have granted various exemptions to larger companies, which smaller companies will not enjoy. With such a bureaucratic system, as the hon. Member for Croydon, South described it, the compliance costs will be much higher for small companies. The Government are reinforcing the existing anti-small business features of the tax system. Small businesses already have higher compliance costs than larger companies. Again, the Government seem to be favouring the big boys.
As for who will be caught by IR35 and who will not, the key issue is the definition of self-employment. No doubt we will debate that in detail in Committee.


The Government need to realise that, in the knowledge economy, self-employment is inevitably a more difficult concept to pin down.
In the case of physical goods—say, rabbit hutches—it is easy to prove that one is a sole trader manufacturing rabbit hutches and selling them on. A sole trader running a shop can show that he has premises from which he sells his wares. However, if the goods and services that one is providing are in one's head, and those are provided to a number of clients, of course that will be more difficult to prove under the old rules fashioned two centuries ago.
When the Minister replies to the debate, will she tell us of any case dealt with by the courts in which they have defined for the knowledge economy the criteria that constitute self-employment? Whereas there are a host of cases that define self-employment in many other industries, there is no such case law for the new economy and the IT sector. The Government and the Inland Revenue have to make it up as they go along. That leads to huge uncertainty and will result in people facing penal tax rates, which they should not have to do.

Mr. Gerald Bermingham: I have been listening to the hon. Gentleman with great care, and I declare an interest as a practising lawyer. I have many clients; I have no single client. I am self-employed. I can offset the costs of going to my place of employment, and the costs of my chambers—what I have to pay towards the bill. I cannot offset anything else, except perhaps the odd course. What is the difference between me and someone in the IT sector? [Interruption.]

Mr. Davey: There are many differences. If the hon. Gentleman looks at the details, he will see that the costs that self-employed people in many businesses can offset against their profits are much greater than those that he mentioned.

Mr. Bercow: Does the hon. Gentleman agree that, as one of my hon. Friends lucidly observed from a sedentary position, one important distinction between the two individuals is that whereas there is no obvious shortage of lawyers, there is an obvious and worrying shortage of IT professionals?

Mr. Davey: The hon. Gentleman makes a good point.
I shall take head on one of the charges made by the Minister on Second Reading and in another forum—

Mr. Campbell-Savours: rose—

Mr. Davey: No, I will not give way.
The Minister made a comparison between an employed nurse and a self-employed IT consultant. That is like trying to compare apples with pears. A more correct comparison would involve a nurse working from a nursing agency. The Minister would find that under tax law, that nurse is seen as self-employed and would thus be subject to exactly the same tax rules as the self-employed IT contractor.
If the Minister makes the precise and fair comparison, she will find that the people who are complaining about the legislation are on the side of nurses and teachers.

We argue that employees in the private sector and the public sector should be on the same tax system, and that the self-employed who work in the public sector and in the private sector should also be on the same tax system.
That is the basis of our argument, and the Minister must not try to confuse it. I refer her to a case—Clark v. Oxfordshire Health Authority 1998—in which the Court of Appeal ruled that a nurse working for a nursing bank was indeed self-employed for tax purposes. Let us not have false arguments from the Treasury Bench tonight, please.
A self-employed person—a nurse or an IT contractor—is subject to a different tax and benefits system from those who are employed. That is a straight fact, which the Government should acknowledge. The self-employed are liable to corporation tax if they make real profits, and they will not get the benefits that employed people get. The distinction between being employed and being self-employed is crucial and of long standing in our taxation system.
The Government are trying to change that through a hidden tax increase. It will be more damaging to the economy in the longer term than any of the other tax increases that they have tried to impose, because it will damage the key sector of the future British economy.

Mr. Frank Doran: The attack that we have heard from the two Opposition Front Benches is familiar to all of us who have been following the matter. The Liberal Democrat spokesman was a little more sensitive to what the Government are attempting to do, but we have just heard a recitation of all the claims made by the Professional Contractors Group, which most of us received in our mail bag, without any attempt at analysis or proper examination of the system.
If the Government pursue their agenda to introduce a fair tax system, which we all support, and business taxes are progressively reduced to become the lowest in Europe, loopholes need to be closed. I support totally the principle behind the Government's aim, but I shall deal in detail with one aspect of the process that causes me concern in my constituency.
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Most of the debate on the issue so far in the Chamber and earlier has concentrated on the IT industry. That is developing into a global industry, and the reality of any global industry is that people will go where the work is. It is nonsense to suggest that hordes of IT specialists will uproot themselves and their families to go to other countries on the assumption that those countries do not charge tax. The hon. Member for Croydon, South (Mr. Ottaway) appeared not to be aware that such countries have similar legislation in place. People will go where the work is, and it is clear that much of the work is in Britain, which is spearheading a lot of development.

Mr. Ottaway: I should clarify that the quotes that I gave were not from people who have not gone or may be going, but from people who have gone.

Mr. Doran: I am questioning whether the Government's proposals are the sole reason for their going.
During the past 14 months since the Chancellor made his announcement, I have received a substantial mailbag on the issue. My hon. Friends the Members for Aberdeen,


North (Mr. Savidge) and for Aberdeen, South (Miss Begg) and I organised two meetings in our constituencies to meet contractors affected. More than 180 people attended and we had full and frank discussions. [Interruption.] They were useful discussions. Those meetings brought to my attention the problem that I am about to raise and clarified a number of issues for me, making me even more supportive of the Government's position.
The comments that have been made to me fall into two categories. There are the honest contractors who say, "Yes, this has been going on for years. We wondered when you would catch up with us," and there are the others who mouth the sort of comments that we have heard from the Opposition Front-Bench spokesman. We need a little reality and balance.
I want to concentrate on a particular issue. I want to talk not about the IT industry, but about the oil industry. Aberdeen is the centre of the European offshore oil industry. As most hon. Members will know, oil is a global industry. It is also a volatile industry. For example, in 1985–86 there was a substantial downturn in the industry and the oil price went down from about $32 a barrel to $9 almost overnight. About 50,000 jobs were lost, but, because they were spread throughout the country, there was not quite the outcry that we have seen with other large-scale industrial closures or job losses. However, Aberdeen was seriously affected.
The oil industry responded quickly, altering the basis on which work was carried out in Aberdeen. I cannot give percentages because each company varies, but a large proportion of people now employed in the oil industry are contracted. The industry uses them to provide flexibility for the bad times. For example, at the beginning of last year, when the oil price virtually halved overnight from about $20 a barrel down to $9 or $10, the redundancies were almost invisible because contractors were simply shaken out of the industry. Their contracts were terminated. All the contractors who stayed, from the large contractors employing hundreds, sometimes thousands, of people, down to the one-man bands that we have talked about tonight, were forced to take substantial cuts, some as high as 20 per cent., which were imposed by the oil companies across the board with no questions asked. That was the requirement if people wanted to keep a contract. Contracts are written in a way that ensures that oil companies have the power to do that. It gives the oil industry flexibility and that is the price that people who work in the oil industry have to pay.
The oil industry is international. I am used to seeing in my surgery people who have just come back from contracts abroad—from Kazakhstan, the Gulf of Mexico, Australia and Indo-China. They work all around the world. We already have a global industry, and people are used to moving around in it. The oil industry is a mature industry. Some people say that it is in decline; it is, but it is a slow decline. However, it is clear that its future will depend on the sort of contracting arrangements that we have debated tonight.
One of the issues that came up at the meetings that I had with contractors in my constituency was employment status. The hon. Member for Kingston and Surbiton (Mr. Davey) talked about employment aspects. One of my concerns about the Government's proposals is that there is a suggestion in the legislation that there is an element

of choice. Unfortunately, in my constituency, employees who are contracted by the oil industry do not have a choice. There is a chain of employment, and contractors are employed in the industry only through employment agencies, many of which specialise in the sort of skills that are needed offshore. Those employment agencies provide employees, either for the main contractors who provide the services directly to the oil industry or for the oil companies themselves, but usually for large contracting companies.
When I discussed the issue with the oil industry and the employment agencies in my constituency, I asked why it was a requirement that employees who worked as contractors should establish companies. Only companies are accepted. All are forced to form personal service companies to provide the contracting skills that the oil industry wants. The simple reason is that the Income and Corporation Taxes Act 1988 places a liability on employers to pick up the tab for any failure on the part of an employee to pay national insurance or PAYE contributions. The oil industry, the contractors who work for the oil industry, and the employment agencies that are the direct line of employment for my constituents who work as contractors in the oil industry, are not prepared to take that risk, so my constituents are forced to form companies.
In discussions with my constituents, collectively and privately, many have made it clear to me that their choice would be, first, obviously, to have a proper job with proper pay, paying PAYE and national insurance contributions like everyone else. That option is denied to them because of the nature of the oil industry. Their second option would be to be self-employed without the hassle of running a personal service company and having to make returns and employ accountants, and to obtain the reliefs to which they would be entitled as self-employed people. However, the system does not allow for that because the employing companies are not prepared to take the risk.
My concern is that service companies in my constituency have no choice. Many see the advantage of self-employed status, but because of the effect of the 1988 Act, that option is not available to them. Therefore, while reiterating that I support the aims and principles of the legislation, I ask the Minister to consider that point.

Sir Nicholas Lyell: In the past three years, there has rarely been a subject like this on which so many thoughtful and intelligent constituents have come to see me to discuss matters so deeply. Ever since the IR35 proposal was put forward by the Government, I have been visited by a series of constituents, mostly working in the IT industry, who are deeply concerned about the proposals and whose fears have not so far been assuaged by the answers that I have received from the Minister.
The net point made by the Chief Secretary is that nobody will be caught by IR35 who would not be deemed to be an employee under existing employment law. That is stated in the letters that I have received in reply to the many letters that I have sent on behalf of constituents. However, my constituents are not satisfied that that is the case and, unless the Minister can satisfy the House that it is, the proposals should be removed. That is why I support the Opposition's proposal to delete clause 59.
The contractors in the IT sector who come to visit me make the point that they in no way seek to avoid tax; they seek to provide services to an industry that demands flexibility in a way that enables them and their employers—I do not use the word strictly, but those who use their services—to operate in the most effective manner. They point out that they always take a reasonable salary from their service companies, and that those service companies pay the usual tax and insurance on salaries. They say that they have no knowledge of the system whereby someone is an employee on Friday and self-employed on Monday morning. One of those who came see me is an experienced chartered accountant, who acts for many people in the IT sector. He, too, has never come across the Friday evening, Monday morning syndrome, that is part of the Government's case.
Contractors point out that they either work for several companies that use their services, or for one company at a time, for periods that are not easy to predict. That requires the flexibility to be able to move out of a particular sort of employment and take the risk of seeking new employment. As I said earlier, the contractors use service companies, which means that they pay tax and national insurance. Those companies are similar to the examples, such as that of the nurse, that Ministers cite when pushing their case. It was rightly pointed out that an agency nurse would make a better comparison.
The contractors stressed the unreasonableness of the 5 per cent. expenses limit. I should like to know whether the Paymaster General intends to stick to that. I am not sure whether she is catching my remarks. If we consider the costs of accountancy, purchasing and maintaining computers, and training, it is unrealistic to expect them to be met on 5 per cent. The Government should take note of that. One contractor said that his training costs regularly totalled £2,000 a year.
It is not fair to treat those who work for a service company simply as employees. They are treated as employees without the benefits that ordinary employees receive. If the contractors whom we are considering were employed, an employer would pay his share of their national insurance contributions. if they were made redundant, they would receive redundancy payments. They do not receive such payments under the system that they use. If they were unemployed, they would receive jobseeker's allowance and the benefits attendant on that. As employees of their companies, they have to forgo those benefits. The Government therefore do not treat like as like.
The Government claim that the proposals are tax neutral. For the reasons that I outlined, they are not. In an artificial way, a specialised IT provider will pay more tax than if he were an employee. The proposals are not, therefore, tax neutral.

Mr. Bercow: Does my right hon. and learned Friend agree that, if the proposals turn out to be tax neutral, it will be the consequence not of a deliberate Government policy decision, but of several contractors ceasing to trade and thus not paying tax?

Sir Nicholas Lyell: My hon. Friend makes a good point. It leads to a point that many hon. Members have

made and to which the Government would do well to pay heed. People are voting with their feet and leaving the country or seriously considering doing so. That is damaging to the country, and will lead to a reduction in the Government's tax take. Hon. Members of all parties have heard highly intelligent constituents, who plainly pay a fair proportion of their income in taxation, express revulsion at the Government's proposals. That would not happen unless there was a serious reason for it.
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Although in the past six months the Government have been pigheaded and refused to give ground, there is a chink of light. The letters that we receive from Ministers encourage people to discuss the matter with their tax inspectors to ascertain whether they can find a way through. Perhaps that means that the Government do not want to be seen to back down, but are giving a nod and a wink to tax inspectors.
The proposals have caused genuine anxiety to a highly intelligent and undoubtedly modern sector in the business community, which the country badly needs. The Government use the expression "modernisation" so often that it makes many of us feel ill. They ought to reconsider the proposals carefully. Unless they are satisfied that those proposals will not do the damage that my constituents fear, they should revise them.

Mr. Fabricant: The Government propose the measure for only one reason: not to close loopholes but to raise money for the Treasury. The clause is not tax neutral; it will raise £900 million. As I said earlier, it will raise that money from the companies, organisations and people whom we need to keep in this country. We need people who are not risk averse, who work in skilled high-tech, sunrise industries and know about computers. Unlike the Prime Minister, who, as a stunt, tried to show that he knew all about e-commerce, but failed to find the "T" for "Tony" on the keyboard, we are considering people who know how to generate not only software for computer companies but income for the nation.
The Paymaster General simply does not care. I sent her 11 plastic bags, which contained more than 3,500 names of people who said that although they were not experts in tax, they were experts in computers and their companies. They said that they would leave the country or, even worse, remain in the country but invoice from abroad and thus deprive the Revenue of money if this nasty clause were passed.

Mr. Barry Gardiner: Is the hon. Gentleman trying to undermine the arguments of Conservative Front-Bench Members? He pointed out that the Government will raise £900 million in revenue through the measure. However, Conservative Front-Bench Members argued that the very 350,000 people to whom he referred, and others, would leave the country and that the money would not be raised. Does the hon. Gentleman intend to undermine Conservative Front-Bench Members, or does he simply fail to understand their arguments?

Mr. Fabricant: The hon. Gentleman would have made a good intervention if he had kept to the point. I realise


that he is only a new boy, but, in future, if he wants to make a killer point, he should make it short. Rambling on a bit gives one time to think.

Mr. Gardiner: Answer the question.

Mr. Fabricant: I shall answer. The hon. Gentleman is an opera singer and clearly creative. His mind wandered during my introduction. I mentioned earlier in an intervention that the figure of £900 million came from the Red Book, which makes a prediction. Perhaps the hon. Gentleman has recently appeared in the Chamber, or perhaps only his body has been present while his mind has been elsewhere, but as my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) and others, including me, said, the Government probably will not raise the money because people will go out of business or go abroad.
The Government cannot claim ignorance because people have gone to see the Paymaster General. She has not always been in a particularly listening mood, but people have talked to her and she has not responded.

Mr. Bercow: Is my hon. Friend aware that my constituent Mr. Mark Gillis, a software consultant, has just ceased to trade? At the beginning of April, I wrote to Treasury Ministers on his behalf. The Paymaster General signed a reply dated 26 April, which she appears not to have read and which shows no acknowledgement of the fact that that individual is one of her first victims.

Mr. Fabricant: Mr. Mark Gillis may be one of the first, but I am sure that he is the first of many—[Interruption.] This is no laughing matter. He is one of the very people we need if this country is to succeed in the 21st century.

Mr. Bercow: This is no laughing matter for Conservative Members or, in fairness, for Liberal Democrat Members. Does my hon. Friend agree that it is disgraceful that Labour Back Benchers find it hilarious that someone has ceased to trade, losing an invaluable business? Such is their intelligence.

Mr. Fabricant: Such is Labour Back Benchers' understanding of business. Those who have spoken are barristers, solicitors or social workers. Those are all great careers in themselves, but such people are risk averse.

Mr. Bermingham: You are joking.

Mr. Fabricant: Perhaps not barristers. I exclude the hon. Gentleman from that remark, although I shall refer to a couple of inaccurate points that he made earlier. The Labour party is unfamiliar with what business men—even small business men—have to endure. If one is to be taxed at a particular level, there must be a benefit.

Mr. Beard: Labour Members' derision had nothing to do with a person going bankrupt. It was prompted by the absurdity of attributing going out of business to legislation that has not yet been passed.

Mr. Fabricant: As we say in the Chamber, the hon. Gentleman makes his point in his own way, and his own way is interesting indeed.

Mr. Bercow: I am grateful to my hon. Friend for giving way again as he has given me the opportunity to elucidate

for the benefit of the hon. Member for Bexleyheath and Crayford (Mr. Beard). Does my hon. Friend understand that my constituent Mr. Mark Gillis is ceasing to trade now because he has the capacity to see ahead? He is aware beyond doubt that he will be clobbered by the Government's proposals and that remaining in business will not be worth his while. He is giving up the struggle against the Treasury leviathan.

Mr. Fabricant: Either way, it is interesting to speculate: will Mr. Mark Gillis choose to stay in this country and claim from the state as unemployed or will he become an opportunity cost by going abroad to trade, thus reducing this country's status? That effect will be magnified many thousands of times as the high-technology and software writing position of rival countries improves.
IR35 is nothing new. Such a measure was proposed by the Inland Revenue in the early 1980s, the late 1980s and the early 1990s as a tax-producing dodge—a way of raising money for the Treasury. Previous Conservative Chancellors rejected that method outright because they recognised the effects that it would have on small business men and sunrise industries in particular. What is new is that this Government, because they are unable to understand the requirements for producing a high-technology-oriented nation, have fallen for it hook, line and sinker, and 60,000 people will he affected. Perhaps they will all go abroad. Then the Government can say, "We've got 60,000 fewer people. That is why we are allowing so many asylum seekers into this country." [Interruption.] I shall not pursue that line, Mr. Martin, because you would rule me out of order, but there is no other logic to it. Surely the Paymaster General and the Chancellor are not naive enough to fall for a particular proposal even though previous Chancellors refused to do so. That would be absolutely wrong.

Dawn Primarolo: I am sure that the hon. Gentleman did not want to make a gratuitous and unacceptable comment in referring to asylum seekers. May I help him? If he wants to criticise the Government on the fast-tracking of work permits, he is entitled to do so. However, every Member of the House recognises that pouring oil on the flames represented by the hysterical language that some Members use about asylum seekers has no place in the Chamber.

The First Deputy Chairman: Order. I shook my head earlier to show that I would not allow a debate on asylum seekers. Points have been made by both sides so it will be best if we return to the debate on the clause.

Mr. Fabricant: Thank you, Mr. Martin. I would not like to create a situation in which the Paymaster General can be even more pompous and patronising than usual.
A couple of interventions on my hon. Friend the Member for Croydon, South (Mr. Ottaway) showed a lack of understanding of the effect of IR35, and the hon. Member for St. Helens, South (Mr. Bermingham) asked an interesting question of the hon. Member for Kingston and Surbiton (Mr. Davey): what is the difference between a lawyer and a worker in a high-tech software industry? Let me answer that. I put it to him that there are two clear differences. First, as a barrister, he is self-employed and already enjoys all the benefits of not being hit by IR35.


When the Bill is passed, he will retain those benefits, but people in high-tech industries will not. In effect, they will be on schedule E, while he is on schedule D.
The second difference is more profound. As a lawyer, the hon. Gentleman does not have to invest quite so much in technology. He has to invest in books and needs access to the internet, but I am not convinced that he requires access to as much software and chip writing as those who work in the high-tech industries. He also does not have to travel to seek work. If he had to go to Aberdeen to represent an oil company, he would be retained by a solicitor and would already have the contract. People seeking a contract to write software may travel to Aberdeen, not win the contract and be unable to claim travel and accommodation expenses.

Sir Nicholas Lyell: My hon. Friend points up another unfairness between IT contractors, on whose behalf we are speaking, and self-employed people such as myself and the hon. Member for St. Helens, South (Mr. Bermingham). I have returned to private practice and I know that barristers are spending a lot of money on IT as well as on books and retraining. However, they are not restricted to 5 per cent. of their gross earnings whereas IT contractors, who are at the cutting edge, are being so restricted. I want the Government to justify that. Can my hon. Friend help me?

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Mr. Fabricant: Sadly, I cannot help my right hon. and learned Friend—and, even more sadly, I doubt whether the Paymaster General will be able to help him either.
It is clear that those who will be hit by IR35 will experience all the penalties and none of the benefits. We have already heard that they will receive no sick-pay benefit, no holiday-pay benefit and no unemployment benefit. They will not be able to charge equipment against tax; nor will they be able to charge their travel and accommodation.
We are discussing a provision that was rejected by Conservative Chancellors, by Australia and Germany and, to an extent, by the United States. I ask the Minister to check with her officials after the debate to establish whether the information that she gives is wholly correct, because she will find that in some American states there is no IR35 provision.
Yet again, Labour has demonstrated that it is no friend of business. Yet again, it has accepted tax-raising schemes proposed by the Inland Revenue and rejected by Conservative Chancellors. Yet again, Government spin doctors have been dragooned into demonising small high-tech businesses in sunrise industries by namecalling—by branding them tax-dodgers. Yet again, Labour has shown itself to be of the deepest red hue: while pretending to be "new Labour", it has driven those that are part of the enterprise culture into a new and more damaging brain drain.

Mr. Bermingham: I did not intend to make a speech, but when I hear an argument so misused and language so abused in the making of terrible points that have no merit, I feel that I must deny my natural self-restraining principles.
The hon. Member for Lichfield (Mr. Fabricant) has done it again. I do not know whether it is the time of the month or the movement of the moon that produces the rants, but they occur with periodic frequency. The hon. Gentleman really is being rather silly—and I say that with the greatest respect.
Let us suppose that I am an information-technology contractor, and an expert in the field. Let us suppose that I suddenly decide that the tax regime will be against me, and resolve to take myself to Paris, Frankfurt, Dublin or another European capital or major city and flog my services from there. In that event, I would find myself paying tax in Paris, Frankfurt or Dublin, where personal taxation is higher. Oh dear! It seems that that would not be a very wise move.
I realise that, as a humble barrister, I do not live in the whiz-kid world of today; I live in the world of yesterday. Let me gently remind the hon. Member for Lichfield, however, that I was once a senior partner in a firm that employed hundreds and hundreds of people, and today employs thousands. I have just a little bit of knowledge about the running of large businesses with million-pound turnovers: I speak on the basis of experience rather than ignorance.

Mr. Ottaway: That was a long time ago.

Mr. Bermingham: Yes, but there is a funny thing about some of us. We may move to a different side of our profession, but we keep in touch with our former colleagues, and we therefore keep up to date with what is happening—shock, horror.
Be that as it may, let us suppose that I am an IT consultant, or perhaps an engineer. Why do we not hear much about the Institution of British Engineers and the engineering consultants? Why do we not hear much about surveyors, chartered accountants, or, indeed, specialist pharmacists and forensic scientists who act as sole practitioners and consultants? We hear nothing about those people, who are all self-employed. That is because, when they set out to be self-employed, they set themselves up in a way that justified the tax allowances and expenses that they could claim. How do they do that? Well, they charge a fee for their services, and if they earn more than £60,000 a year gross—I think that that is the current turnover—they charge value-added tax, which is, of course, collectable and payable. They then find themselves in the interesting position of having to finance their own expenses and overheads. In my case, that will be chambers fees; in the case of pharmacists or forensic scientists, it may be laboratory fees. They will offset the costs against their incomes, which will result in a net figure on which they will pay tax in the normal way.
There is, however, a risk in being self-employed. Self-employed people are not paid during their holidays. They are not paid when they are sick, so they cannot succumb to any illness unless they are insured against it. If they are made redundant—if they are no good, and are out of a job—they do not receive unemployment benefit. That is the risk.
If IT consultants set themselves up in the same way, they must take the same risks as the rest of us who are self-employed. I am not here to say whether that is good or bad; but if there are dodges that mean that some people receive holiday and sickness pay and all the rest while


pretending to be self-employed, and if that is not open to those who are self-employed, should there not be a level playing field? Let me tell the hon. Member for Lichfield and the hon. Member for Kingston and Surbiton (Mr. Davey) that there are ways of organising one's affairs to ensure that one is genuinely self-employed and, as such, taxed genuinely. There are, however, risks and disadvantages in being self-employed, from a taxation and from a personal point of view.

Mr. Edward Davey: The hon. Gentleman is completely misrepresenting the issue. The self-employed IT contractor does not receive the sickness and unemployment benefits that the hon. Gentleman is trying to claim that he would receive: the hon. Gentleman has misunderstood the tax change that we are debating.

Mr. Bermingham: In fact, the hon. Gentleman has completely misunderstood what I am saying. I said that, for someone who is self-employed, those are the disadvantages. If the IT contractor is genuinely self-employed and consults an accountant, he will be in exactly the same position as others and there will be no problem. I do not understand the sudden assumption that there is a difference.

Mr. Malcolm Bruce: I know that the hon. Member for Aberdeen, Central (Mr. Doran) has already raised this issue, but may I raise a specific point relating to contractors in the oil industry? They do not have the option of becoming self-employed, because the oil companies will not deal with them if they do. They must set themselves up as separate businesses, yet they are restricted to the 5 per cent. allowance. Many of my constituents say that their expenses constitute 10, 15 or 20 per cent., but that they cannot reclaim those amounts. Is that fair?

Mr. Bermingham: That is exactly why I accept what was said by my hon. Friend the Member for Aberdeen, Central (Mr. Doran). I was about to refer to exceptional circumstances in which the nature of the industry—[Interruption.] Just one second. In such circumstances, the nature of the industry creates a climate in which a level playing field is not possible.
I accept the concept that lies behind what the Government seek to do. Like my hon. Friend the Member for Aberdeen, Central, I also accept that there are exceptional circumstances that need to be dealt with. However, we must not throw out the baby with the bathwater; we must seek to rectify the situation, and perhaps that will happen later.
That is why I was rude about the hon. Member for Kingston and Surbiton. In fact, when I intervened on him I was trying to be helpful. If he does not accept that, it is sad. Sometimes I try to be helpful even to Liberal Democrats, although it goes very much against the grain. It was, however, the speech of the hon. Member for Lichfield that prompted me to speak, because again it was the wrong point in the lunar cycle and we got a rant.

Mr. Fabricant: On a point of order, Dr. Clark. Is it in order for one Member to make personal remarks about another?

The Temporary Chairman (Dr. Michael Clark): I do not think that I heard any personal remarks.

Mr. Bermingham: I agree with my hon. Friend the Member for Aberdeen, Central, who made a valuable

point. I hope that it will be taken on board, that eventually self-employed will mean self-employed, and that the advantages and disadvantages will be the same for all self-employed people, whatever their field.

Sir Robert Smith: I welcome the contribution that we have just heard because it highlighted the problems of the oil industry and reinforced the point already made by the hon. Member for Aberdeen, Central (Mr. Doran). I too represent a constituency in the north-east of Scotland, where many constituents are concerned about how the proposals in IR35 will affect them. I reinforce the point that it is not just the one sector—the IT industry—that will be affected; several sectors are affected.
When the Welfare Reform and Pensions Bill was going through the House last year, many Labour Members were completely blank as to whether there was a problem at all, or where it was coming from. It seems to be an issue that affects some constituencies very badly and does not touch other constituencies. Well over 60 constituents have raised the issue with me directly, yet I have talked to Members from other parts of the country and not a single constituent has raised it with them. That is why the understanding is perhaps deeper among some Members than others.
I reinforce the point about the oil industry. I hope that if the Government cannot take it on board tonight, they will at least hint that they will take it on board later in the Standing Committee. People find themselves working through single-person companies not because they went to an accountant and said, "How can I minimise my tax take?" but because they lost their job, and setting themselves up to work through a single-person company was the only way they could get another.
The Government must therefore look carefully at the arbitrary 5 per cent. costing and explain where it came from and how it was worked out. Why can they not recognise genuine costs that have been incurred by someone trying to operate a company, and look at the actual costs on a case-by-case basis, individual by individual?
The other problem in the oil industry is the ageing profile of the people working in it. Many of them are getting near to retirement. They are trapped, having made their financial plans on the basis of the current arrangements. I wonder whether the Government could give them any hint, advice or certainty as to how they might sort out their pension arrangements and what their future plans should be if the Government push through their proposals unamended. Now that those people are so near to retirement, there is little scope for them to make adjustments. They have planned on the basis of a way of working and a tax regime that they understood, working towards retirement.
Others may have made slightly better provision for retirement, but there is a threat of skill shortages. The downturn in the oil industry and the low prices have masked a serious recruitment problem. The next generation is not coming into the industry. Some people will look at the proposals, the way their life is going and what they have already sorted out and will say, "Perhaps early retirement is the way forward for me." There could be a loss of skills and a loss of work force.
I hope that we will hear from the Government that they recognise that it is not just an IT problem, but one that affects other sectors in the economy—it affects many in


the north-east of Scotland in particular—and that the people coming to my surgeries who face 20 per cent. cuts in their contract income, as the hon. Member for Aberdeen, Central has already said, are not high-flying earners looking for a great tax avoidance regime. The industry is structured in a certain way, so they have worked in that way. They have now been hit by a sledgehammer and are looking for some reassurance from the Government that, finally, at the 11th hour, there will be an understanding that they have genuine costs that need to be met and recognised.

Mr. Swayne: In view of the lucid exposition given by my right hon. and hon. Friends, from which we have all just benefited, and particularly in view of the robust contribution of my hon. Friend the Member for Lichfield (Mr. Fabricant), I shall not need to detain the Committee long.
Like my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell), I have benefited from meeting many intelligent and articulate constituents who have brought their concerns about the measure to me, but they are not quite as clever as some of us might imagine. I had about 30 written representations and have met half the authors. About two thirds of them—let us say 10 of them—prefaced their remarks with the extraordinary and unprompted admission: "I did not vote for you. I am very sorry, Mr. Swayne. I voted new Labour for the first time at the general election." One cannot help having a slight smirk on one's face and saying, "Is it not a measure of your own contributory negligence that you now find yourself in the position that you are in?" They were warned that it would be like this and that is how it has turned out. However, one has to rise above that personal, selfish, unworthy reaction and consider the national problem that is being engendered by the measure, which will affect not only our own constituents.
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The Government's attitude has been given away by the terminology that they have used. They have spoken of disguised employment that should be otherwise—that should be proper employment. It is a Canute-like attitude. They do not like the world that they find but want it to be otherwise and introduced the measure to make it so.
The world is different for a good reason. For 10 years before I was elected to the House, I worked as a systems analyst for a large bank. That 10 years spanned the change—

Mr. Campbell-Savours: Who was analysing whom?

Mr. Swayne: For the benefit of the hon. Gentleman, who comments from a sedentary position, I was analysing risk management systems and dealing rooms at the cutting edge of modern technology, so I know what I am talking about. Those 10 years spanned great change in the industry. When I started, the IT department of the bank was effectively the monopoly supplier of IT services to the bank, but the technology itself changed and became much more project driven.
We required skills that we did not have. Those skills had to be acquired from the marketplace, but, given the nature of technical change, they were necessary only for a short period so we found ourselves relying much more heavily on the contract market.
Yes, we employed as contractors people whom we had previously employed full-time. That was not because we were a bogey employer who made people redundant and then tried to find a cheap way of employing them subsequently; it is the nature of the change in technology that has driven these things. The Government's attempts to turn back the clock by altering the tax system and the national insurance framework will fail, to the detriment of the industry as a whole and to our economy.
Last night, the hon. Member for Workington (Mr. Campbell-Savours) seemed unable to appreciate the fact that—[Interruption.] I can remember. He seemed to be unable to appreciate the fact that people change their behaviour in response to economic stimuli. He will recall that in the debate on excise duty he would not accept that a large price differential would affect how much that people traded legally or illegally in a market. That is precisely the attitude that now seems to dog Labour Members.
I accept entirely the force of the argument that has been made by Labour Members that if the IT high-tech contractor, who has largely been the focus of the debate, suffers certain disadvantages in respect of his employment conditions—the lack of sick pay, the lack of holiday pay or whatever—he will need to be recompensed through the pay packet, rather than through the tax system. That argument has force, but Labour Members fail to appreciate that we are, in effect, in a global market. Employees and companies can consider the conditions and the tax situation that apply elsewhere.
People who have skills and are capable of moving elsewhere will do so if they perceive that the circumstances will benefit them. That was precisely what the hon. Gentleman could not understand last night about the sale of cigarettes. It is also precisely what he cannot understand about the IT industry and how people move in response to economic stimuli.

Mr. Bercow: My hon. Friend is developing a powerful argument. Does he agree that for someone who ceases to be an employee of a company thereafter to become a consultant to that company is both commonplace and entirely unobjectionable? Is not the fact that it strikes Labour Members as so bizarre merely testimony to the fact that the great majority of them have only ever worked either in the public sector or for pressure groups and regard any other pattern of employment with incredulity?

Mr. Swayne: I often found myself having to acquire specific skills in order to manage a particular project. If someone who had previously been in the employment of my organisation was available in the marketplace, that person would be my natural first choice because of his knowledge of the organisation; so it is entirely proper that such people should be so employed.
Further to my point about economic stimuli, Labour Members fail to take account of the fact that we are desperately short of certain skills, and if we drive people with those skills abroad we will all suffer. Labour Members have continued to deny the fact that those


people will indeed move abroad. As my hon. Friend the Member for Croydon, South (Mr. Ottaway) pointed out, they have done so and are doing so simply in anticipation of the proposed changes. I know that it is extraordinary for some Labour Members to consider that anyone would uproot themselves from England and go to Holland, for example, and have to live with brass money and wooden shoes. However, the reality is that people will move overseas, despite the prejudices of Labour Members. It is an extraordinary little Englander attitude from a party that claims to be so communautaire.

Dr. Vincent Cable: I should like to say a few words in support of my hon. Friend the hon. Member for Kingston and Surbiton (Mr. Davey), who originally called for this debate. The speeches that we have heard this evening have vindicated that request.
Difficult though it may be, given the way in which the debate has proceeded, it might be useful to identify what are admittedly rather limited areas of common ground. There is some acceptance among Labour Members, at least formally, that there are people working in the IT industry and the offshore oil industry who are self-employed, even in the narrow terms defined in the Inland Revenue regulations and in tax law. I believe that the estimate is that something like 20 per cent. of the current IT contractor population will be given self-employed status. The phenomenon of the self-employed contractor is acknowledged to exist, but I am interested in why the figure of 20 per cent. has been used. It may be larger or smaller and I should like to know why it has been defined in that way.
Conservative and Liberal Democrat Members fully acknowledge that there are cases of abuse and that there are people who are trying to avoid tax by creating single-person companies. It is absolutely right that any Government should try to deal with those cases. That is common ground among Members on both sides of the Committee. We are concerned about the others—it maybe a large group of people—who fall between the two categories. Essentially they fall into two groups, as the hon. Member for Aberdeen, Central (Mr. Doran) said. Some people are involuntarily working in the sector mainly because of their age. The IT industry is a very young industry in which anybody over 30 is considered old. Many people are forced out of organised employment and have to accept frequent and multiple contracts. They have to accept the risks, but they cannot define themselves as self-employed, as the hon. Member for St. Helens, South (Mr. Bermingham) argued they should, because of the nature of their work, which the hon. Member for New Forest, West (Mr. Swayne) explained. They mainly undertake project work, which means that they are likely to fail a control test as they work as part of a team under a project manager, probably for several months at a time. Such people are involuntarily in the position of self-employed service companies and they will be hit the hardest.
The second category comprises people who have consciously chosen that life style. They are willing to accept the risks and the fact that they have no job security, no guaranteed employer contribution and no national insurance contributions. They take all the risks in order to enjoy the flexibility of that life style, but, because of the way the tax law operates, they cannot be classified as

self-employed. Those two groups of people, who are not tax avoiders, and who under no circumstances can be described as such, will be hit the hardest. That is why there is such strong feeling among Opposition Members.
As it is such a grey area and the big arguments of principle have already taken place, many of us are looking for some sign that the Government recognise that a large number of people are on the margin, and are prepared to show some flexibility in dealing with them. They could do so in two main ways. First, they should recognise the force of the arguments about the limited nature of the 5 per cent. allowance. Many of the people to whom I have spoken can produce their accounts showing expenses of up to 20 per cent. Even if one discounts a little, expenses are generally considerably more than 5 per cent., for reasons that have been set out in some detail.
In addition, the Government should show some flexibility in the way in which the Inland Revenue deals with individual cases. My understanding is that some people could face penal charges if, quite accidentally, they classified themselves as self-employed and were subsequently determined not to be. I believe that the Inland Revenue sets itself five years to determine whether the self-employment principle applies, and people who are subsequently found to be in the wrong category after a year face tax penalties. That seems absolutely wrong. If someone has made a genuine mistake, the tax that they have paid should be credited to their eventual account.

Mr. Bercow: The hon. Gentleman and I agree that it would be better not to have these proposals at all. However, will he clarify whether he is advocating a larger blanket expenses limit to take account of the concern that the proposed limit is not adequate, or suggesting the operation of a taper, which might have some merit, but would be administratively highly burdensome?

Dr. Cable: I take the hon. Gentleman's point that it would be burdensome. If I were making a recommendation, it would be for the former.
Finally, one point that emerged from the discussion a few moments ago related to the total tax take, which is now estimated to be £900 million. When we discussed the matter six or nine months ago, the figure cited was £450 million. Will the Paymaster General explain why the estimate has changed so radically? Is it because, as I rather suspect, the conditions and exemptions will be much more narrowly drawn, so the tax base will be significantly higher? Is it based on some sort of calculation of how much leakage there will be in terms of people leaving the profession? This is a genuine question; I do not know the answer. It would be useful to know why this tax measure, which was initially introduced as having a modest tax take, is now approaching the £1 billion mark.

Dawn Primarolo: I thank the hon. Member for Twickenham (Dr. Cable) for his calm approach to an important discussion. I know that he has worked hard. He has written to me and has come to see me to discuss the issues. That is in marked contrast to other speeches from Opposition Members. I hope that I will be able to deal with all the points that have been raised, but if I do not manage to do so, I am sure that the hon. Gentleman will intervene.
Let me start with the points on which we appear to agree. I shall quote from Computer Contractor—a magazine that seems to be very relevant to the debate, as we are talking about information technology contractors. Under the headline "Make hay while the sun shines", it states:
The optimum salary to draw this year is £4,335, which covers your personal allowance…I know a lot of readers will be worried about the minimum wage. Although this does not apply to company directors…it is highly unlikely that any contractor will be served with a notification.
Beg, borrow and steal to avoid paying higher rate tax this year. Next year you will not be able to avoid it. You should recognise your company for what it is, a tax haven.
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Many quotes have been given in the debate. I shall quote from a letter to The Independent written by someone who has worked in the IT industry for 27 years. He said:
Although there are many honourable exceptions, the majority of—
service company workers—
were cynically taking the rest of us for a ride…They should admit defeat gracefully and be grateful for all the years in which they got away with their rip off on society. The Government is to be congratulated for making them contribute their fair share towards the funding of our hard-pressed public services. [Interruption.]
Opposition Members can heckle as much as they like. Today, so far, all that they have done is repeat the well known arguments of one organisation—the Professional Contractors Group, which was established exclusively to campaign against the proposal. People in that organisation have a vested interest in not wanting the provision to be applied.

Sir Nicholas Lyell: Will the Minister give way?

Dawn Primarolo: If the right hon. and learned Gentleman will allow me to make this point, I shall happily give way to him.
The points made in the debate have dealt with whether the companies are entrepreneurs; whether the definition of self-employment correctly reflects the labour market in the sector; whether the people concerned are entitled to benefits; whether there will be a brain drain; what Australia is doing in its legislation on the matter; whether the proposal is discriminatory in any way; whether there has been consultation; whether it is an attack on large business—

Mr. Bercow: Small business.

Dawn Primarolo: Yes. The points also dealt with whether small businesses are being assisted in meeting training costs; whether there will be a legal challenge to the proposal; and the issues that the oil industry has raised. The right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) also made some points on self-employment status and the 5 per cent. deduction for training costs. I hope to deal with all those points as calmly and clearly as the Committee will allow me to do. First, however, I shall be happy to give way to the right hon. and learned Gentleman.

Sir Nicholas Lyell: I am most grateful to the Minister. Does she realise that the constituents who have come to

see me on the matter have all made the point that they pay themselves substantial salaries, on which they pay tax? Plainly, they do not fall into the categories described in the two quotations that she has given. They are deeply concerned about the 5 per cent. limit because, among other things, they have genuine expenses that are far higher than that figure.

Dawn Primarolo: I am grateful for the right hon. and learned Gentleman's comments, as I wanted to deal with that point. The objective of some of the speeches made in this debate and of the arguments made by some vested interests has been to spread fear and misinformation about how the arrangements will work. Although I hope to deal clearly with those points in my speech, the Committee will have other opportunities to deal with them.
In the past 12 months, much information has been published about our proposals for tackling tax and national insurance avoidance by service company workers and others who provide services to clients through intermediaries. I think that it is fair to say that the general objective of our proposals is pretty well understood now. We want to stop people who are really the same as employees from dressing up their working arrangements by setting themselves up as a service company to avoid paying the correct level of properly due tax and national insurance.
As I said, individuals are not entitled to choose self-employed status simply because they fancy being self-employed. There are clear precedents and case law defining "self-employed" and "employee". The proposal seeks clearly to align rights, so that if someone is an employee, he or she is entitled to all the rights of an employee and will be defined as such. Conversely, if someone is self-employed, he or she will continue to receive all those other rights.
I fear that many of the companies with which the right hon. and learned Member for North-East Bedfordshire has been in contact are under a misapprehension about how the rules will affect them.

Sir Nicholas Lyell: If the Minister, by saying that those companies are under a misapprehension, means that they do not need to worry because they will be accepted in the status that they require, why are they to be limited to 5 per cent. expenses? Does she realise that those who have come to see me—like those who have gone to see most of my hon. Friends, I suspect—are highly intelligent people performing a function in which it is not open to them to be employees, because those for whom they work do not wish to employ them as employees? Those people can do the job only through the type of service company that we are discussing, and they are being badly and unfairly hit by the proposals.

Dawn Primarolo: People who are employees will receive exactly the same treatment as every other employee in the tax system. However, we have agreed that, for those employees who seek to work through service companies, we shall allow a 5 per cent. deduction to help run those companies. Nevertheless, we are saying that they are employees. If they are self-employed, the 5 per cent. deduction will not apply to them because they


have access to all the other reliefs, as ably explained by my hon. Friend the Member for St. Helens, South (Mr. Bermingham).

Mr. Ottaway: Can the Minister confirm that people who are caught by IR35 and end up paying class 1 national insurance contributions will not be in the same position as "an employee" as they will not be entitled to sick pay and other benefits that employees receive, and that they will not be entitled to unemployment benefit between contracts?

Dawn Primarolo: If a worker is designated as an employee and is paying national insurance contributions as an employee—which is the whole purpose of the proposal—he or she will be entitled to the benefits to which any other employee paying national insurance contributions is entitled.

Mr. Ottaway: rose—

Dawn Primarolo: I shall deal with the point in more detail later. If the hon. Gentleman will let me make some progress, and if he is still unclear on the point, I shall give way to him.

Mr. Ottaway: It is on this point.

Dawn Primarolo: The problem is that hon. Members have asked various questions, but are refusing to allow me logically to develop the answers and explain the procedure. Do they want to hear the answers or only to ask more questions?

Mr. Ottaway: I was merely quoting from the Inland Revenue's own guide on the matter, not making up figures. Will the Minister confirm that, when someone has a relevant engagement that is caught by IR35, that person will not be entitled to the benefits of an employee?

Dawn Primarolo: I cannot understand why the hon. Gentleman finds this point so complex. If employees pay national insurance because they are employed as employees, they will be entitled to the same rights as other employees. [Interruption.] Perhaps I should stop looking at Opposition Members, Dr. Clark, and focus my gaze on you. I hope that you will not misinterpret that; it is just that Opposition Members are really not a very attractive prospect.
As I said, I think that the objectives are well understood now. It is true also that all right-minded citizens, business representatives, individual taxpayers and their advisers, Members of Parliament and those who are in the other place recognise—it is a matter of public record—that no one wants that type of avoidance to continue. Such avoidance simply is not fair to the rest of us, and we should deal with it.
It is also true that, until 6 April 2000, people were perfectly entitled to obtain a tax and national insurance advantage by working in that way through service companies. However, it became apparent that many of the people doing so were acting against the spirit of the legislation, to their considerable personal advantage, and at a disproportionate cost to the Exchequer. In reaching this decision, we recognised that we were proposing to

remove what had been a legitimate way of reducing tax and national insurance bills. That is why we announced our intention to make this change a full year ago—to allow good time for preparation and consultation. The Government have taken extensive consultation on this matter. Even the PCG, which has been so extensively quoted, has said publicly that the Government consulted and listened on this matter. However, we have not gone as far as the PCG would have wished.
People with a vested interest in continuing to avoid paying tax and national insurance, plus one or two powerful lobby groups, have been sowing confusion about what the measure does. Let me deal first with the point made by the hon. Member for Croydon, South (Mr. Ottaway) that IR35 is an attack on entrepreneurs. The tax system has a long-established method for distinguishing between employees and the self-employed entrepreneur. Some people have chosen to use service companies because they do not fit the definition of self-employment, but still want to benefit from the tax breaks available for self-employment. They are really only employees who want a better deal from the tax system than that to which their status entitles them. Those people will be targeted by the new rules.
As I said on Second Reading, our intention is not to prohibit the use of service companies. Instead, we are telling those who are really employees that using service companies will not enable them to avoid paying their national insurance and tax at a fair level. The idea that people who are really employees are the same as self-employed people in taking risks, creating employment and seeing their companies grow simply does not stand scrutiny.
We are not talking about all service companies or all IT contractors. The new rules will apply to people in service companies who would be employees of their clients if the service company did not exist. The usual case law tests will be used to determine whether someone would be an employee. Those tests have been used for all others in the tax system and are well known. I do not believe that it is beyond the intellectual capability of those IT consultants who are still protesting to get to grips with these rules.

Mr. Malcolm Bruce: Will the hon. Lady explain how an employee who has travel and training expenses is treated in the same way as someone with a company who has those expenses? Is it not normal for the company's employer to pay those expenses and claim tax relief on them?

Dawn Primarolo: If someone is employed by a company which provides training, there is no claim on a benefit in kind for the employee, but there is no relief—the employer gets it. An employee cannot claim his training expenses—nobody can. Training expenses for employees cannot be tax-deductible. If employees pay for their training, that is up to them.

Sir Robert Smith: Will the Minister give way?

Dawn Primarolo: No.
Opposition Members must fix in their minds what employees are entitled to and what self-employed people are entitled to. We are ensuring that the rules in the tax system are properly aligned.
The next point was that there would be a brain drain—a massive exodus from this country. Many people have said that they will go abroad, but the IT industry recognises that that is just a lot of noise. Britain is still a low-tax country and there will still be good money to be made in the IT industry, even after IR35. The trade journals show what has been said by the profession. Computer Consultant said:
Although many of the contractors questioned said they intended to look for work overseas, the feeling is that this is an expression of contractors' defiant anger rather than a true intention to migrate.
Christine Little of the Recruitment and Employment Confederation said:
I cannot believe the tax advantages of working in Germany or Holland are going to be enough to justify uprooting and moving abroad.
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The idea that IT consultants can go somewhere else where they will not have to pay tax on their earnings is interesting but incorrect. In some countries, workers will be worse off than if they had stayed in the United Kingdom and fallen within IR35. I have received some interesting postcards from someone who allegedly moved to Germany as a consequence of IR35. I have news for that contractor: on an income of £55,000 per year, his take-home pay in Germany will be £25,000. If he had stayed here, it would have been £34,000 under IR35. His friend, who apparently moved to Strasbourg, will be taking home £30,000 instead of the £34,000 that he would have taken home in the UK. In the United States, Norway, Belgium, the Netherlands, Germany—all the countries that contractors claim that they will move to—the liability to tax is higher than it is here.
The next area is to do with the expenses and the 5 per cent. allowances proposed under this measure. The new rules will affect only income from engagements that would have been employment if entered into directly with the client. It is a question of whether an activity passes the employment test. Income from any other source within that service company is completely unaffected by the legislation and can be used by the company to meet running costs, make investments, make capital purchases, employ staff, pay dividends, or whatever.
When a service company has income only from engagements that are caught by the legislation and nothing else, we do not think it right that the service company worker should be in a more advantageous position on tax and national insurance than a conventional employee. I really cannot understand why the Committee is struggling with that simple proposition.
The 5 per cent. allowance, which is on top, is intended to cover the basic running costs of the service company, such as Companies House filing charges and accountancy fees. We have said that we will not inquire into how that money is spent, and also that the service company need not keep any records in support of the expenditure. As far as we are concerned, this is an automatic, flat-rate allowance. It is pretty generous, given that most of the work done by service companies would be as an employee.
The hon. Member for Kingston and Surbiton (Mr. Davey) spoke on Second Reading about the compliance regime. He said that he would ask me again

about whether the position on IR35 would be flexible. I say to him, as I said to the Inland Revenue, that officials are to give the benefit of the doubt where businesses make genuine mistakes when trying to comply with the rules. That is only fair, given the change during this period. It is a light-touch approach. Of course, in the rare cases in which avoidance of tax and national insurance liability is deliberate and intended, the same compliance regime and penalties will apply as exist in the tax system for trying to avoid paying tax and national insurance.
Contractors working for service companies will be entitled to statutory sick pay and maternity pay, like other employees. They may not get the benefits from their clients but they may, in the short term, from their companies. IR35 does not discriminate against anybody in terms of their relationships. The regulations make it clear that we must consider associates and how they work together.
Hon. Members mentioned Australia and questioned whether it had withdrawn its legislation. It has not—it is going ahead with it and has made some amendments, as we have done, but in different areas.
Anyone who meets the accepted definition of an employee should pay tax on the same basis as any other employee. This measure is not anti-competitive and it does not discriminate in favour of big business against small firms. It is simply not true to say that it does. Again, I will quote the industry, in a debate about the measure on "Accounting Web", in which it was stated:
I find it laughable when people who have been using the veil of incorporation to hide what is fundamentally the relationship which would otherwise exist between an employer and an employee, claim that it is somehow going to harm British business. It is not—it's going to harm their pockets.
That is what those affected are complaining about.

Sir Nicholas Lyell: I have been listening carefully to the Minister and I have read the Chief Secretary's most recent letters to me on this important topic. My impression is that the sort of constituents to whom I referred in my speech, who are paying substantial tax but sometimes work for long periods for an individual company that uses their services, will not be regarded as employees and will not be caught by IR35. Will the hon. Lady confirm that only the blatant cases are likely to be caught? Or is she expecting to scoop up the lot, in which case my constituents and those of my hon. Friends and other hon. Members who have spoken will still be very worried?

Dawn Primarolo: I have already answered that question in the debate. The question is whether the person is an employee or is self-employed. The terms and conditions of their contract with their client are the issue and those determine their status. If the relationship with the client is clearly that of the self-employed, as laid down in case law and in the Bill, the answer as to their liability to IR35 is clear.
My hon. Friend the Member for Aberdeen, Central (Mr. Doran) and the hon. Member for West Aberdeenshire and Kincardine (Sir R. Smith) asked a series of questions about the oil industry. If a worker in that industry works for a client in circumstances that meet the definition of employment, PAYE and national insurance should be paid. Until now, clients have been


able to insist that workers set up service companies—my hon. Friend referred to this—to enable the client to avoid liability for PAYE and national insurance.
I listened carefully to my hon. Friend's comments and to those of the hon. Member for West Aberdeenshire and Kincardine. I think that they will find that that definition is the issue and that was the requirement for companies, but I will reconsider those decisions carefully. [Interruption.] I realise that Opposition Members find two things difficult. One is a woman speaking at the Dispatch Box, because they treat women appallingly in the House. The other is that although they ask questions, they do not want the answers because they know the weakness of their case. They can heckle me all they like, but I am putting the Government's case on the record and I intend to continue to do so.
The final question asked by the hon. Member for Twickenham concerned the figures in the Red Book and the increase in the first year to £900 million. He will see from our original assessments that we estimated the number of companies that were using the loophole as we described. We were challenged about the estimate by the hon. Gentleman and a number of organisations. I asked the Inland Revenue to assess thoroughly through our network the number of companies that appeared to be using that mechanism, and which would therefore be affected. That is where the new £900 million figure came from. In truth, the avoidance mechanism is being used far more extensively than we had thought, and the Government have moved to close that loophole.
I commend the clause to the Committee and I look forward to what I hope will be more good-natured debates on the same subject in the future.

Mr. Ottaway: The problem is not that we do not listen to the answers; it is that the Paymaster General does not answer the questions.
The Inland Revenue published a leaflet called, "Questions frequently asked about IR35", which makes it clear that an individual who works through a personal service company will not be in the same position as an employee while both are paying class 1 national insurance contributions. That person will not be entitled to benefits from the company or to unemployment benefit between contracts. The most honest thing that the Minister could do is admit that, rather than trying to mislead the Committee into thinking that people will be in the same position.
The hon. Lady did not answer the question posed by my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) about the 5 per cent. Most importantly, she did not deal with the fact that the Red Book estimates that the measure will raise £900 million. Inland Revenue documents state that 60,000 companies will be affected. One does not have to be a genius to work out that every one of those companies will have to pay £15,000 a year extra in taxation.
The hon. Lady did not deal with any of those issues, nor did she deal with the fundamental matters raised by hon. Members on both sides of the Committee, despite the objections of the hon. Member for Aberdeen, Central (Mr. Doran). That is why we will vote against the measure.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 252, Noes 147.

Division No. 177]
[7.57 pm


AYES


Adams, Mrs Irene (Paisley N)
Dowd, Jim


Ainger, Nick
Drew, David


Alexander, Douglas
Dunwoody, Mrs Gwyneth


Allen, Graham
Eagle, Maria (L'pool Garston)


Armstrong, Rt Hon Ms Hilary
Ellman, Mrs Louise


Atherton, Ms Candy
Ennis, Jeff


Austin, John
Field, Rt Hon Frank


Banks, Tony
Fisher, Mark


Barnes, Harry
Flint, Caroline


Bayley, Hugh
Flynn, Paul


Beard, Nigel
Foster, Rt Hon Derek


Benn, Hilary (Leeds C)
Foster, Michael Jabez (Hastings)


Benn, Rt Hon Tony (Chesterfield)
Foulkes, George


Bennett, Andrew F
Fyfe, Maria


Benton, Joe
Gardiner, Barry


Bermingham, Gerald
George, Bruce (Walsall S)


Berry, Roger
Gerrard, Neil


Best, Harold
Gibson, Dr Ian


Blackman, Liz
Godman, Dr Norman A


Blears, Ms Hazel
Godsiff, Roger


Blunkett, Rt Hon David
Goggins, Paul


Borrow, David
Gordon, Mrs Eileen


Bradley, Keith (Withington)
Griffiths, Nigel (Edinburgh S)


Bradshaw, Ben
Grocott, Bruce


Brinton, Mrs Helen
Grogan, John


Brown, Rt Hon Gordon (Dunfermline E)
Gunnell, John



Hain, Peter


Brown, Rt Hon Nick (Newcastle E)
Hall, Mike (Weaver Vale)


Brown, Russell (Dumfries)
Hamilton, Fabian (Leeds NE)


Browne, Desmond
Hanson, David


Butler, Mrs Christine
Heal, Mrs Sylvia


Byers, Rt Hon Stephen
Healey, John


Campbell, Mrs Anne (C'bridge)
Henderson, Doug (Newcastle N)


Campbell, Ronnie (Blyth V)
Henderson, Ivan (Harwich)


Campbell-Savours, Dale
Hepburn, Stephen


Cann, Jamie
Hill, Keith


Caplin, Ivor
Hinchliffe, David


Caton, Martin
Hodge, Ms Margaret


Cawsey, Ian
Hood, Jimmy


Chaytor, David
Hoon, Rt Hon Geoffrey


Clapham, Michael
Hope, Phil


Clark, Rt Hon Dr David (S Shields)
Howells, Dr Kim


Clark, Dr Lynda (Edinburgh Pentlands)
Hughes, Kevin (Doncaster N)



Humble, Mrs Joan


Clarke, Charles (Norwich S)
Hurst, Alan


Clarke, Eric (Midlothian)
Hutton, John


Clarke, Rt Hon Tom (Coatbridge)
Iddon, Dr Brian


Clarke, Tony (Northampton S)
Jackson, Ms Glenda (Hampstead)


Clelland, David
Johnson, Alan (Hull W & Hessle)


Clwyd, Ann
Johnson, Miss Melanie (Welwyn Hatfield)


Coaker, Vernon


Colman, Tony
Jones, Rt Hon Barry (Alyn)


Connarty, Michael
Jones, Helen (Warrington N)


Cooper, Yvette
Jones, Ms Jenny (Wolverh'ton SW)


Corbett, Robin


Corbyn, Jeremy
Jones, Dr Lynne (Selly Oak)


Corston, Jean
Jones, Martyn (Clwyd S)


Cranston, Ross
Keen, Alan (Feltham & Heston)


Crausby, David
Khabra, Piara S


Cryer, Mrs Ann (Keighley)
Kilfoyle, Peter


Cryer, John (Hornchurch)
Ladyman, Dr Stephen


Cummings, John
Lawrence, Mrs Jackie


Cunningham, Rt Hon Dr Jack (Copeland)
Lepper, David



Levitt, Tom


Dalyell, Tam
Lewis, Ivan (Bury S)


Darling, Rt Hon Alistair
Liddell, Rt Hon Mrs Helen


Davey, Valerie (Bristol W)
Lloyd, Tony (Manchester C)


Davies, Rt Hon Denzil (Llanelli)
Love, Andrew


Dawson, Hilton
McAvoy, Thomas


Dean, Mrs Janet
McCafferty, Ms Chris


Denham, John
McDonagh, Siobhain


Donohoe, Brian H
Macdonald, Calum


Doran, Frank
McDonnell, John





McFall, John
Ross, Ernie (Dundee W)


McGuire, Mrs Anne
Rowlands, Ted


McIsaac, Shona
Roy, Frank


McKenna, Mrs Rosemary
Ruane, Chris


Mackinlay, Andrew
Ryan, Ms Joan


McNamara, Kevin
Sarwar, Mohammad


MacShane, Denis
Savidge, Malcolm


Mactaggart, Fiona
Sawford, Phil


McWilliam, John
Sedgemore, Brian


Mahon, Mrs Alice
Sheerman, Barry


Marsden, Paul (Shrewsbury)
Simpson, Alan (Nottingham S)


Marshall, Jim (Leicester S)
Skinner, Dennis


Meacher, Rt Hon Michael
Smith, Rt Hon Andrew (Oxford E)


Meale, Alan
Smith, Miss Geraldine (Morecambe & Lunesdale)


Michael, Rt Hon Alun


Milburn, Rt Hon Alan
Smith, Jacqui (Redditch)


Miller, Andrew
Smith, John (Glamorgan)


Moffatt, Laura
Smith, Llew (Blaenau Gwent)


Moonie, Dr Lewis
Snape, Peter


Moran, Ms Margaret
Soley, Clive


Morgan, Ms Julie (Cardiff N)
Spellar, John


Morley, Elliot
Squire, Ms Rachel


Morris, Rt Hon Sir John (Aberavon)
Steinberg, Gerry



Stevenson, George


Murphy, Denis (Wansbeck)
Stewart, David (Inverness E)


Murphy, Jim (Eastwood)
Stewart, Ian (Eccles)


Naysmith, Dr Doug
Stoate, Dr Howard


Norris, Dan
Stuart, Ms Gisela


O'Brien, Bill (Normanton)
Taylor, Rt Hon Mrs Ann (Dewsbury)


O'Hara, Eddie


Olner, Bill
Taylor, David (NW Leics)


O'Neill, Martin
Temple-Morris, Peter


Organ, Mrs Diana
Thomas, Gareth (Clwyd W)


Osborne, Ms Sandra
Timms, Stephen


Palmer, Dr Nick
Tipping, Paddy


Pearson, Ian
Todd, Mark


Perham, Ms Linda
Trickett Jon



Truswell, Paul


Pickthall, Colin
Turner, Dennis (Wolverh'ton SE)


Pike, Peter L
Turner, Dr Desmond (Kemptown)


Plaskitt, James
Turner, Dr George (NW Norfolk)


Pollard, Kerry
Twigg, Derek (Halton)


Pond, Chris
Tynan, Bill


Pound, Stephen
Vis, Dr Rudi


Powell, Sir Raymond
Ward, Ms Claire


Prentice, Ms Bridget (Lewisham E)
Wicks, Malcolm


Prentice, Gordon (Pendle)
Williams, Rt Hon Alan (Swansea W)


Prescott, Rt Hon John


Primarolo, Dawn
Williams, Alan W (E Carmarthen)


Prosser, Gwyn
Williams, Mrs Betty (Conwy)


Purchase, Ken
Wilson, Brian


Quin, Rt Hon Ms Joyce
Winnick, David


Radice, Rt Hon Giles
Wood, Mike


Rammell, Bill
Worthington, Tony


Rapson, Syd
Wray, James


Raynsford, Nick
Wright, Dr Tony (Cannock)


Reed, Andrew (Loughborough)


Reid, Rt Hon Dr John (Hamilton N)
Tellers for the Ayes:


Roche, Mrs Barbara
Mr. Robert Ainsworth and


Rooker, Rt Hon Jeff
Mr. Don Touhig.



NOES


Ainsworth, Peter (E Surrey)
Brand, Dr Peter


Allan, Richard
Brazier, Julian


Amess, David
Breed, Colin


Ancram, Rt Hon Michael
Brooke, Rt Hon Peter


Arbuthnot, Rt Hon James
Browning, Mrs Angela


Ashdown, Rt Hon Paddy
Bruce, Ian (S Dorset)


Atkinson, Peter (Hexham)
Bruce, Malcolm (Gordon)


Baldry, Tony
Butterfill, John


Ballard, Jackie
Cable, Dr Vincent


Berth, Rt Hon A J
Campbell, Rt Hon Menzies (NE Fife)


Bercow, John


Blunt, Crispin
Cash, William


Boswell, Tim
Chapman, Sir Sydney (Chipping Barnet)


Brady, Graham




Clappison, James
Madel, Sir David


Collins, Tim
Malins, Humfrey


Cormack, Sir Patrick
Maples, John


Cran, James
Maude, Rt Hon Francis


Curry, Rt Hon David
Mawhinney, Rt Hon Sir Brian


Davey, Edward (Kingston)
May, Mrs Theresa


Davies, Quentin (Grantham)
Michie, Mrs Ray (Argyll & Bute)


Davis, Rt Hon David (Haltemprice)
Moore, Michael


Donaldson, Jeffrey
Moss, Malcolm


Dorrell, Rt Hon Stephen
Nicholls, Patrick


Duncan Smith, Iain
Norman, Archie


Emery, Rt Hon Sir Peter
Ottaway, Richard


Faber, David
Page, Richard


Fabricant, Michael
Paice, James


Flight, Howard
Paterson, Owen


Forth, Rt Hon Eric
Pickles, Eric


Foster, Don (Bath)
Portillo, Rt Hon Michael


Fowler, Rt Hon Sir Norman
Prior, David


Fox, Dr Liam
Robathan, Andrew


Gale, Roger
Robertson, Laurence


Garnier, Edward
Robinson, Peter (Belfast E)


Gibb, Nick
Ross, William (E Lond'y)


Gill, Christopher
Rowe, Andrew (Faversham)


Gillan, Mrs Cheryl
Russell, Bob (Colchester)


Gray, James
St Aubyn, Nick


Green, Damian
Shephard, Rt Hon Mrs Gillian


Greenway, John
Shepherd, Richard


Grieve, Dominic
Simpson, Keith (Mid-Norfolk)


Gummer, Rt Hon John
Smith, Sir Robert (W Ab'd'ns)


Hamilton, Rt Hon Sir Archie
Spicer, Sir Michael


Hammond, Philip
Stanley, Rt Hon Sir John


Harvey, Nick
Steen, Anthony


Hawkins, Nick
Streeter, Gary


Heald, Oliver
Swayne, Desmond


Heathcoat-Amory, Rt Hon David
Syms, Robert


Hogg, Rt Hon Douglas
Tapsell, Sir Peter


Horam, John
Taylor, Ian (Esher & Walton)


Howard, Rt Hon Michael
Taylor, John M (Solihull)


Howarth, Gerald (Aldershot)
Taylor, Matthew (Truro)


Jack, Rt Hon Michael
Taylor, Sir Teddy


Jackson, Robert (Wantage)
Thomas, Simon (Ceredigion)


Jenkin, Bernard
Tonge, Dr Jenny


Johnson Smith,
Tredinnick, David


Rt Hon Sir Geoffrey
Trend, Michael


Key, Robert
Tyler, Paul


King, Rt Hon Tom (Bridgwater)
Tyrie, Andrew


Kirkbride, Miss Julie
Waterson, Nigel


Kirkwood, Archy
Webb, Steve


Lansley, Andrew
Welsh, Andrew


Leigh, Edward
Whitney, Sir Raymond


Letwin, Oliver
Whittingdale, John


Lewis, Dr Julian (New Forest E)
Widdecombe, Rt Hon Miss Ann


Lidington, David
Wigley, Rt Hon Dafydd


Lilley, Rt Hon Peter
Willis, Phil


Livsey, Richard
Wilshire, David


Lloyd, Rt Hon Sir Peter (Fareham)
Winterton, Mrs Ann (Congleton)


Llwyd, Elfyn
Winterton, Nicholas (Macclesfield)


Loughton, Tim
Yeo, Tim


Lyell, Rt Hon Sir Nicholas
Young, Rt Hon Sir George


McIntosh, Miss Anne


MacKay, Rt Hon Andrew
Tellers for the Noes:


Maclean, Rt Hon David
Mrs. Eleanor Laing and


Maclennan, Rt Hon Robert
Mr. Peter Luff.

Question accordingly agreed to.

Clause 59 ordered to stand part of the Bill.

Clause 102

DOUBLE TAXATION RELIEF

Question proposed, That the clause stand part of the Bill.

Mr. Oliver Letwin: I should begin by declaring the interest that stands in my name in the


Register of Members' Interests, which apparently gives me the unfortunate and dubious advantage over some representatives of Her Majesty's Treasury of understanding the effect that clause 102 will have on British industry.

Mr. Graham Allen: Is that a recommendation?

Mr. Letwin: I do not know whether the hon. Gentleman will find by the end of my remarks that it is or is not a recommendation. It makes one so profoundly miserable about the process of our government when one understands the way in which the measure came to pass and what it contains that I am left regretting that I understand it.

Mr. Allen: It makes one want to clear off back to the City.

Mr. Letwin: It would be precious little use obeying the hon. Gentleman's usual sedentary animadversions, because if the measure were to have its way, a good part of the activities of the City would be removed at a stroke.
It is surprising in many ways that we are having this debate, because the measures in clause 102 and schedule 30 have been the subject of probably the most sustained and intellectually effective destruction job on a tax measure of the past few decades. Yet we are having a debate because the measure still stands.
The Committee will want to know the history of the measures. We are told something about them in the explanatory notes. I should say in defence of the Treasury, which I am otherwise about to excoriate, that the notes on clauses in this respect are an admirable example of clarity. The officials who wrote them deserve the thanks and congratulations of the Committee for making clear just what is going on in this noxious clause. Paragraph 42 of the notes on clause 102 and schedule 30 makes a statement which is as near to misleading the House as I suspect that parliamentary language will allow me to allege. The statement is:
The measures contained in Schedule 30—
and hence the subject of clause 102—
have been drawn up after extensive consultation with business.
That is an oddity. It is perfectly true that there was extensive consultation with business—one of the more extensive consultations that has been carried out in respect of any tax measure in the Bill. Unfortunately, it was consultation on a different proposition.
It is an interesting concept of consultation that we have here. I might consult you, Dr. Clark, about the prospect of my giving you cornflakes tomorrow morning for breakfast. You might tell me that you prefer Frosties. But if my intention was to electrocute you, I might not have discovered everything that I wanted to know about your response to my proposition. The Government's consultation is a somewhat similar case.
I may say also in defence of Inland Revenue officials that the consultation paper is a model of intellectual rigour and one of the loci classici of exposition of the advantages of export of capital neutrality. The document goes through in awesome detail systems of exemption, systems of

credit, systems of onshore pooling and systems of mixing. It comes to the view, in section 6.32 on page 29, that
Mixer companies have been in use for a considerable number of years. Multinational groups have structured their overseas interests accordingly. Relief for underlying tax, which mixers facilitate, of around £4 billion a year is allowed each year. Both mixer companies and onshore pooling present a number of interesting and complex issues of both an economic and a technical nature. It will be important for the future to strike the right balance between them.
So what the Inland Revenue said to British industry in one of the longest and most detailed consultation exercises in recent years was that it was important for the future to strike the right balance between mixer companies and onshore pooling.
Looking round at some of the distinguished Members present, some of whom have served in Ministries and some of whom have been enormously important members of the Treasury, I am sure that they already understand the measure, but in case anyone has the slightest shade of doubt about what clause 102 and schedule 30 do, I inform them that they prevent the practice of mixing. In other words, they prevent the averaging of the rates of tax incurred in foreign jurisdictions by the subsidiaries of a multinational company, and thus, by means of such averaging, a greater offset against United Kingdom tax than would otherwise be the case. There are two methods of achieving that greater offset. One is through mixer companies, which are artificially established subsidiaries offshore, and the other is through the method of so-called onshore pooling, which achieves the same effect but within the United Kingdom tax jurisdiction.
So two possibilities were put in the consultation exercise, either of which would serve admirably the purposes of British industry and of multinationals located and headquartered here. British industry was asked to reply to the consultation document and tell the Inland Revenue which of the two systems was preferable, or whether some other system that would roughly speaking achieve the same results was preferable. That was an admirable and sensible exercise—but what happened when clause 102 came along? Why, Dr. Clark, not the cornflakes but the electric shock. It turned out that the effect of clause 102 was not mixer companies, onshore pooling or something similar to them, but the opposite. It was to destroy at a stroke the system of averaging offshore tax rates, in order to clobber British industry headquartered here with multinational outlets and subsidiaries.
In passing, I might mention that the process that I have described contravenes the Government's own code of practice. I do not think that the Government believe that codes of practice matter. They are prolific in producing codes of practice. When they came to power, they produced more codes of practice than probably all the Governments of that century put together—so many that Ministers probably cannot keep up with which codes of practice they issued or what those codes say.
In December 1997, with a great flourish, the part of the Treasury for which the Paymaster General is responsible—the Inland Revenue and Customs and Excise—introduced a code of practice on consultation. I do not know whether anyone reads these codes of practice inside ministerial offices. I have no doubt that people read them inside the Inland Revenue; they probably they live by them as a kind of bible. I have no doubt that when Ministers conducted the consultation exercise, they


intended that it should conform to their code of practice on consultation exercises. So I suppose that when they asked people whether they would prefer mixing or pooling, Ministers genuinely meant to choose the one or the other.
It would have been a good idea if they had done that, because page 6, section 3 of the code of practice tells the people consulting on behalf of the Inland Revenue that they ought to assess
the likely effect on tax revenues
of the measure being put forward. It is a little difficult for an industry that is being consulted to assess the likely effect on tax revenues or its tax payments of a measure about which it is not being consulted.
You are learned in many respects, Dr. Clark, and I wonder whether you would find it easy to answer if I were to ask you what would be the tax effect of increasing your income tax by 5 per cent. when what I really wanted to know was what would happen if I increased your income tax by 50 per cent. You might be forgiven for giving me an odd answer. That is what happened in the case of British industry. As it was asked not what would be the effect of the measures in clause 102 but what would be the effect of some other set of measures that have not been implemented and are the opposite of the measures in the clause, it did not give the answer that is required in a consultation exercise. That is probably why the Government misestimated the effect of the measure on their tax revenues.
When I say that the Government misestimated, I do not mean that they got it wrong by 5 per cent. or 10 per cent. Goodness me, no Opposition Member would be so ungenerous to the Paymaster General as to suppose that she could make an accurate forecast of tax revenue. No Chancellor of the Exchequer, no Paymaster General and no Financial Secretary has ever been able to do that. People get it wrong by 20 per cent., 30 per cent. or 50 per cent. All of those are accepted, but this is not a case of getting it slightly wrong. This is a positively heroic error. I cannot recall a time in recent history when such an error has been made. They got it wrong, roughly speaking, tenfold. If the Chancellor of the Exchequer got things wrong to that extent in general, he would bankrupt us and use up our gross domestic product about five times over. It was quite a mistake to make. If such mistakes were generally made about taxation, one could produce some interesting economic effects. Why did the Treasury make the mistake? It made it because it consulted on the wrong measure—the opposite measure. Therefore it did not have the slightest idea what the effect on taxpayers would be.
I say all those things not just because they are important in themselves, but because they relate to the reason why we have a code of practice. Of course, Ministers may have intended the code to be just window dressing, but they sent some earnest officials away to write it. Those officials wrote it sensibly, got down to business and worked out what one should do if one is consulting. They worked out that if one is consulting about tax, it is jolly nifty to find out what the effects on industry will be. Therefore, they said that one should ask that question—but the Treasury and the Inland Revenue did not ask it because they asked a question about a set of measures that they were not proposing to introduce and did not

introduce. Perhaps the Inland Revenue intended to introduce them, but the Treasury did not; I shall come to that point shortly.

Mr. Edward Davey: Will the hon. Gentleman confirm that the code on consultation allows the Government to introduce anti-avoidance measures without consulting, but that the Government have explicitly said that these measures are not about anti-avoidance?

Mr. Letwin: The hon. Gentleman, as so often on these matters, is absolutely right. First, this is not an anti-avoidance measure. Secondly, it does not tackle avoidance. Thirdly, the Government have admitted that, and fourthly, as he rightly said, the code specifically exempts anti-avoidance and some other measures from consultation. For example, it exempts measures that would be evaded if consultation about them took place.
However, this clause does not fall into that category. It is a classic case of a highly complex and important tax measure being introduced, about which there should have been consultation, and about which the code says there should have been consultation. There was no consultation, because the consultation took place about something else—the opposite measure.
I have written today to the Cabinet Secretary to ask him what is to be done about a Department that breaks its own code of practice. I have asked him what administrative sanctions apply, what a Department should do when such a contravention comes to light, and how its accounting officer should behave.
I have also asked the most important question. Hundreds of highly paid individuals in British industry—this is not my major point, but it is important—have spent a couple of years thinking about what the Inland Revenue has proposed, and they tried to answer its question. They spent a lot of time with their advisers, and that is expensive time. Perhaps it is some of the most highly paid time in the country, but all that was a total waste of time and money because they answered a question about cornflakes when they were facing electrocution.
I have asked the Cabinet Secretary what administrative redress and what ex gratia payment the Treasury and the Inland Revenue will make to people who have wasted their time because of a consultation exercise about the wrong thing. If the answer to my question is, as it may be, that there is no such redress, my advice to those sections of British industry would be to bring a class action and to test in court whether there can be redress in such a case. There jolly well should be.
I have outlined the history of the consultation exercise. I now come to the brilliant measure itself. How does it achieve its intended result? What is its intended result?

Mr. Stephen Dorrell: What is the purpose of the measure?

Mr. Letwin: That is exactly the right question. What is the measure's intended result? I admit to a profound perplexity on this matter. It is possible, although I hardly dare allege such a thing in such an august assembly as this, that the person or persons who invented the measure—I do not think that they are in the Inland Revenue at all—intended that it should raise a lot of extra money for the Exchequer. I hardly dare allege that,


because Ministers have denied it repeatedly and I know that they are honourable. However, someone somewhere in the Treasury—not a Minister, but certainly not in the Inland Revenue, because it consulted about the opposite change—had the brilliant idea that he could invent the most complicated and stealthiest tax of all time—a tax that he hoped no one at all would understand, which would raise a large sum of money. That is one possibility.
The intervention of my right hon. Friend the Member for Charnwood (Mr. Dorrell) is particularly apposite to the other possibility, and my right hon. Friend the Member for Fylde (Mr. Jack) made the point forcefully on Second Reading. It is also possible that this is a simple case of a catastrophic administrative error, and the measure has no aim at all. The Government have not the slightest intention of achieving the results that it will achieve, or any other discernible results. They might simply be engaged on an acte gratuit to prove that one can be an existentialist Treasury. That is a possibility. Surely, we should follow the dictum that, when one has looked in all the possible places and not discovered the true answers—we know that they are not true because Ministers have denied them—we have to look in the impossible places. Therefore, I suggest that it is possible that the measure is an arbitrary action or a knee-jerk reaction. If so, it represents an interesting departure in administration. If tax policy is to be conducted on that basis—without warning and with or without consultation, but perhaps with consultation on the opposite—we may discover that all sorts of taxes are changed in the coming years. I rather look forward to that. It will be fun to stand at the Dispatch Box and watch them go by as one watches the symbols on a one-armed bandit.

The Temporary Chairman (Dr. Michael Clark): We are captivated by the hon. Gentleman's hypotheses, but we would be even more engaged if he discussed the substance of the clause.

Mr. Michael Jack: rose—

Mr. Letwin: Before I give way to my right hon. Friend, may I wholly accept your admonition, Dr. Clark? I shall return to discussion of the clause.

Mr. Jack: I am grateful to have the opportunity to enable my hon. Friend to get back on track. He may recall that on Second Reading the Paymaster General gave us a hint of the missing reason for the proposal. In some way, it would have a remarkable effect in lowering high tax rates in other tax jurisdictions. Has my hon. Friend had a chance to consider the validity of that line of argument?

Mr. Letwin: I am now about to come to something really astonishing. This point relates directly to the clause, but my right hon. Friend and I are both suffering from an important form of selective amnesia. I have exactly the same memory as him of what happened in an exchange on Second Reading, so I read the Hansard report of what the Paymaster General said in response to him on Second Reading. Strangely enough, the report appears to be slightly different from my memory. I know that Hansard is always accurate, so my right hon. Friend and I—I assure you that we have not discussed this with each other, Dr. Clark—must have suffered from a collective hallucination. I am glad of that. If the Paymaster General

had said what we mistakenly supposed—contrary to the Hansard record—that she had said on that occasion, she would have said something so manifestly ludicrous that it would have been impossible to imagine that it could have come from a Minister of the Crown.

The Temporary Chairman: Is this hypothesis No. 2?

Mr. Letwin: No, Dr. Clark, because I shall come on to what the Paymaster General said in Hansard, which is one of the arguments now being alleged for the clause.
I hope that I can end this excursion simply by saying that I am unclear about what on earth the Government are trying to achieve by the clause. Therefore it is difficult to tell whether it will achieve its aim. However, it is clear what it will achieve. First, it will clobber British industry for about £4 billion a year—I may be wrong, but I am not wrong by the scale on which the Chancellor was wrong. It might be £3.5 billion—I shall grant the Paymaster General that—or it might even be £3 billion. There is not a serious set of accountants or business men in Britain today who think that the figure is much less than that.
When Pricewaterhouse first referred to that effect of the clause, the Government did something that takes us beneath the level about which we should joke. Instead of answering the point and investigating it seriously—to do them justice, I think that they have begun to do that, and I shall discuss the reasons why shortly—they impugned on the Floor of the House the honour and professionalism of a serious professional who is one of the partners of Pricewaterhouse. I regard that as gross abuse of parliamentary privilege. The Paymaster General should take that back on behalf of the Government or repeat it outside the House of Commons, which would mean that she would be sued for a serious amount of money.

Mr. Beard: Is the hon. Gentleman suggesting that when PricewaterhouseCoopers was asked for instances of companies that would suffer from the proposed legislation, it was not able to quote even one?

Mr. Letwin: The hon. Gentleman, no doubt honourably and genuinely, is entirely misled about what happened within the Treasury. If necessary, I am prepared to go into the details of what happened, which I happen to know. I will not detain the Committee with that because I now propose to list those who have said exactly what the effects of the proposal will be—

Mr. Beard: Subsequently.

Mr. Letwin: The hon. Gentleman tries my patience. It is true that the responses were subsequent, but 24 hours subsequent to the visit and before the Paymaster General's statement in the House. If we were to get to the seriousness of the matter, things could become very uncomfortable for Ministers.
We now have absolute clarity about what British industry thinks of the proposal. I will start with the


Institute of Directors. I suppose that Labour Members will think that it is prejudiced. However, it is pretty moderate on the subject. It states that it is
a further blow to UK-based multinationals… The Government should withdraw this paragraph from the Finance Bill…and have a proper consultation prior to the Finance Bill 2001. The consultation in 1999 bears no relation to the UK system as amended by this paragraph, and is therefore worthless in this context.
I know that the CBI will be dismissed by some Labour Members as a mere collection of capitalists. However, what does it have to say about the matter? It states:
This clause introduces Schedule 30 containing a draft of radical and unheralded changes to the existing law on Double Tax Relief, particularly in relation to restriction of relief involving mixer companies. The biggest problem which business has with the provision is their adverse effect on the international competitiveness of businesses located in the UK.
I shall return to that point in a moment. The CBI continues:
Companies of different sizes across the sectoral spectrum, whose business is vital to the success of the UK economy, have raised concerns about the adverse impact of the proposals.
Forty of the CBI's companies, a small fraction of those that will be affected, are estimated to be losing about £700 million a year.
The CBI continues:
Specific problems are discussed below but the overall effect of the adverse changes…has been to create a situation where a number of commentators, including companies which have contacted the CBI, are saying that the UK will now have one of the worst, if not the worst, double tax regimes amongst the G7 nations.
What does the Association of Corporate Treasurers have to say?

Mr. Jack: Before my hon. Friend departs from the point about foreign jurisdictions, will he note that in response to a parliamentary question that I tabled to the Paymaster General, inviting her to put on record what information the Treasury had about foreign tax jurisdictions in this context, she was unable to supply any?

Mr. Letwin: I am grateful to my right hon. Friend. had noticed that. That is why later I shall supply the information for the Treasury; I think that he is already in possession of it. If it had looked into the matter, I am sure that it would have discovered what the Inland Revenue already knew. As the Treasury was introducing a measure, the opposite of that which the Inland Revenue had been consulting about, it is quite possible that it did not want to ask the Inland Revenue what the effect of the measure that the Inland Revenue thought that it was not introducing would be if it were introduced.
The Association of Corporate Treasurers tells us that the announcement on 21 March
of the sweeping and fundamental changes to the double tax relief … system took the entire business community by surprise …. these changes reduce the UK's competitiveness as a base for multinationals…The suddenness of the change and its fundamental nature is extremely disconcerting.
I do not know whether the association is also regarded as a dangerous group of lunatic capitalists, but the Chartered Institute of Taxation really cannot be put into that category by the Paymaster General. She spends most of

her time in the House of Commons telling us how she will close loopholes, apparent loopholes or what seem to her to be loopholes, that will destroy other sections of British business, on the ground that the institute has told her to do so. The institute, her favourite body, tells us:
In the discussion paper dated March 1999, and in discussions with the Inland Revenue International Division—
that is an important point in itself because it mentions not just the paper but what was said after it was issued—
the impression was given that offshore mixer companies were accepted and that, indeed, some form of onshore pooling was being considered. In the event, the proposals go in the opposite direction. This calls into questions the bona fides of the consultation process and the way in which the Revenue and the Treasury work together in relation to taxation policy decisions.
We have begun to hear what will be the prolonged murmur of companies that are thinking of re-siting their headquarters away from the UK. Zurich Allied cited its reasons a few days ago; today, it is SmithKline Beecham. Whatever the Paymaster General may care to do to an innocent partner of a major accounting firm when he raises the truth, I doubt that even she will want to assert that those companies, which between them employ thousands of people in this country, are to be neglected, ignored or abused. We have the seeds of a serious malaise in our economy; they have been sown by a provision that is unheralded and unannounced, and about which there was no effective consultation.
Why did it happen? Part of the reason, probably, was that the Inland Revenue was genuinely and honestly moving in an entirely rational direction. From what we can gather, an economic adviser in the Treasury then had a bright idea. It was suggested to Ministers that they could make a large amount of money very easily and quickly from a source that had not been the subject of the initial levy when the Government first came into power, but which was mighty rich. The Ministers were told that it would never be defended in public because no one would have the gall to do so. That was because the source was nasty capitalists coming from abroad called multinational companies. I think that that is what happened.
Was the process by which it happened respectable? No, it was not. I have dealt with that already. Regardless of the merits of the measure, the process was disreputable. Much more important is the question whether it is substantively tolerable. What are the Government's arguments for taking £3 billion, £3.5 billion or £4 billion a year off the multinationals that are headquartered in the UK, and do they stand up to scrutiny? The first argument is that the figures are all wrong, and unfortunately that argument is right, but it backfired. As I have pointed out, the figures that are wrong are those of the Government, and the measure makes a huge hit on the multinationals headquartered in Britain.
The second argument has not been made here, but I suspect that it has been made in some quarters in the Treasury, and it is rather more ingenious. The hon. Member for Kingston and Surbiton (Mr. Davey) will enjoy this argument, which is parallel to some of those used during the proceedings on the Government Resources and Accounts Bill. It runs as follows: multinationals currently headquartered in Britain are shackled by the ingenuity of the capital gains tax arrangements because they cannot move their headquarters abroad without crystallising a huge capital gain arising from the difference between the historic cost


of the subsidiaries that they have acquired and their current market value. We can therefore sting them for £3 billion, £3.5 billion or £4 billion because they will not be able to leave these shores and we will not suffer the adverse effects that would be caused by their doing so.
That is a curate's egg of an argument—some parts are good and other parts are not so good. The bit that is good is that it is true. The ingenuity of the capital gains tax system means that existing multinationals with old acquired subsidiaries are shackled to this country. That is not an unusual arrangement; most countries have it. Those companies cannot get out because if they tried to do so they would have to pay the Chancellor a whopping bill—which would probably be greater than the one that we are discussing—all at once, and he would be a happy man. He could put away another several billion pounds to pay off national debt or to spend on the national health service, à choix.
There are two slight problems with the argument. The first is that not all the major multinationals acquired their subsidiaries and assets abroad long ago. Some, such as Vodafone-Mannesmann, have recently acquired massive overseas subsidiaries. I pose as no expert on these matters, but it is not clear that they are shackled to this country. Vodafone-Mannesmann is the biggest company in Britain, the biggest company quoted on our stock market and the most important single element of the very market that the stock exchange today conjoins with markets in Frankfurt and New York.
If the measure is passed, the company might move its headquarters abroad, and if it did, what would go with it? All the lawyers, accountants and consulting engineers, all the people in the City and all those who service all those people, from tea to printing, would lose out. We are not talking about thousands, millions or tens of millions of pounds; we are talking, over time, of hundreds of millions of pounds of economic value that will be lost to this country.

Mr. Howard Flight: Billions.

Mr. Letwin: In the long run, as my hon. Friend says, we could lose billions of pounds.
The second slight problem concerns all the companies that are not yet headquartered here. I have personal experience of this matter, because at one stage I was restructuring INTELSAT, a satellite organisation that involves all 137 countries of the world. The question arose of where the organisation should locate the headquarters of its new privatised spin-off. The most extensive search was performed, ironically by Pricewaterhouse, on behalf of INTELSAT, to identify the countries where multinational companies would most like to have their headquarters. The two that came top of the list were the UK and the Netherlands.
What would happen today? The UK would be at the bottom of the heap. For that reason, if clause 102 is passed, an intangible and unquantifiable economic value will be lost over the years because companies that would have brought their headquarters here will not do so. They will go to the Netherlands or other countries. The idea that the measure will have no real effect because companies are shackled is just true enough to be deeply misleading.
There is a third argument, which Ministers have used and to which my right hon. Friend the Member for Fylde alluded a moment ago. Ministers have tried to claim that we will have a highly competitive regime even after clause 102 has been passed. I am not now suffering from the selective amnesia to which, regrettably, my right hon. Friend and I are subject, because I was able to find this point in Hansard. On 17 April, the Paymaster General said:
when we compare how we tax our multinationals and, in particular, the use of our controlled foreign company legislation, with the practice of our European partners—
she may be thinking of places where there are many company headquarters such as Luxembourg or the Scilly Isles—
we find that the Government's proposals are to bring us into line with the competitive practice of other countries.—[Official Report, 17 April 2000; Vol. 348, c. 758.]
I mention the Scilly isles because the proposition is absurd. The USA has onshore pooling and uses a general basket of offshore credits. Japan has onshore pooling via a worldwide basket. Canada exempts dividends from trading activities worldwide. France and Germany exempt 95 per cent. of dividends from significant shareholdings. Italy does likewise, but only within the EU, although that is changing in 2001 and the exemption will be universal.
Of the G7 countries, the UK, under clause 102, becomes the only one that does not have onshore pooling or exemption as a way of achieving the same effect. The Paymaster General brilliantly exposes us to be the sole candidate to be at the bottom of the heap, the one country that companies would want to avoid if they were seeking to site their headquarters in a major economy.
I do not know what the Paymaster General thought that she meant when she said:
when we compare how we tax our multinationals…we find that the Government's proposals are to bring us into line with…competitive practice,
unless she thinks that bringing us into line with competitive practice means ensuring that we are last in the race. If that is the hon. Lady's general notion of how the UK should be competitive, we have grounds beyond the clause to worry.
8.45 pm
The fact is that the measure, which does not have the justification that it has no real cost, nor that it has no ill effect, nor that it leaves us competitive, has been given another basis by some of the Treasury's utterances: we have been told on various occasions that it is fairer. Only some companies can form mixer companies—how unfair, how wrong; therefore, we must prohibit that practice, which favours the mighty. However, a slight intellectual impediment afflicts that argument. The average fish-and-chip shop does not need to form mixer companies, because it does not have very many international subsidiaries. That point clearly eluded the Paymaster General during her investigation of the subject. It tends to be the case that, before a company has foreign subsidiaries, it becomes rather large—indeed, it becomes a multinational company. Therefore, the unfairness spotted by the hon. Lady is one that does not have the quality of existing.
The next argument advanced is that the system produces capital export neutrality. The Paymaster General and almost everyone here in the Committee knows about


that, but, just in case anyone less informed is reading Hansard, I shall explain that capital export neutrality is an important principle: it is that we should have a tax regime that makes our companies when they invest abroad relatively indifferent to which tax regime they choose to invest under, so that they invest instead in the places where they can most efficiently produce, and that is to the advantage of our companies and their shareholders in the UK. It is an admirable aim, which the Inland Revenue consultation document states as an objective.
However, it would be extremely odd if that were the aim that really explained why the measure is a proper one. First, the Inland Revenue's own consultation document makes it clear, in paragraph 1.6 on page 6, that the overriding objective should be "the national interest" of the UK economy. Whatever the measure does for capital export neutrality, it certainly is not in the interests of the UK economy to send all the multinational headquarters scuttling. Secondly, it is not a strong argument in favour of the scheme because paragraph 3.16, on page 12 of the consultation document, makes it clear that:
The ordinary credit system adopted by the UK and a number of other countries has the twin advantages of going some way towards achieving…CEN—
that is, capital export neutrality—
for the United Kingdom economy.
In other words, the Paymaster General's argument that the system needs to be got rid of because getting rid of it is necessary for the sake of capital export neutrality has the disadvantage that her own Department denies that fact.
Finally, we come to the mystery guest—the item about which my right hon. Friend the Member for Fylde and I are suffering selective amnesia—the thing the Paymaster General never said. Contrary to the imaginings of my right hon. Friend and me, she did not say that the measure would induce foreign countries to adjust their tax rates—oh no. She said something entirely different—and I know she said it because it appears in the Official Report at precisely the moment that we thought she said what we thought she said. In fact, she said something quite interesting:
The use of mixer companies has made UK investors more or less indifferent to the high tax rates in countries in which they invest—
I note in passing that she thereby exposed the fact that the system did achieve the effect of capital export neutrality that she otherwise argued it did not achieve, but leave that lacuna as well. She continued:
and we need to change that focus—
I note in passing that she meant "We need to destroy the capital export neutrality that the Inland Revenue, in its consultation document, said we needed to create," but leave that lacuna. She said:
we need to change that focus to ensure that we receive—
now comes the seminal phrase that my right hon. Friend and I, through our imaginings and hallucinations, never heard—
the correct amount of tax.—[Official Report, 17 April 2000; Vol. 348, c. 791.]
Thus, at the end of a vast circle of imaginings, we come back to our beginning, and it turns out that the measure is, after all, a remarkable one that fits into the category

that we have come to know and love—that of the stealth tax. It is designed to create a means of collecting
the correct amount of tax—
that is, a large amount of tax. When I hear the Paymaster General and her colleagues in future talking of things that are "correct", I shall know that they mean elephantine, gargantuan, enormous. That is the amount of tax that the measure raises, and a brilliant way it is of doing so.

Mr. Jack: I am grateful to my hon. Friend for focusing on the word "correct" because his analysis has alighted on a new principle of taxation. Has he by any chance in his assiduous research come across a definition of "correct" in taxation terms?

Mr. Letwin: I would answer that most instructive intervention—except I know, Dr. Clark, that your beady eye is on me and that if I were to go into the wide-ranging lexicon employed by the Government, you would upbraid and stop me. I shall not be tempted down that line, although we must remember that
the correct amount of tax
will always henceforth mean in the Government's jargon a very enormous amount of tax.
What will be the effect of that tax? It will be to charge those already in this country, to send some of the great new enterprises packing and to deter hereafter, virtually completely, all the highly mobile multinational companies from siting their headquarters in this country. It will try to undo the good work of today in creating our stock markets as a parallel with Nasdaq and Frankfurt; it will try to ensure that our great service industries in the financial services are destroyed; it will in fact try to destroy as much of the British economy as it can in pursuit of
the correct amount of tax.
I must quickly add one other comment. I apologise for detaining the Committee, but it is rather interesting. The debate is in fact wholly otiose. I have not noticed the Minister intervening or asking to make a statement today, but I have noticed, because somebody has passed it to me, that a statement has already been issued to the press about the matter. We already know the answer to the debate, only it is embargoed until 22.00 which, unless I am also suffering from a hallucination, is some little while from now.
It is a strange—a passing strange—thing. We thought that Parliament was debating the matter because it might decide on it and instruct itself and because Ministers might pay attention to Parliament. No, it was not to be. Ministers decided at an earlier hour this evening how they would respond, issued a statement and embargoed it until—I regret to tell them that they may not be quite right—they imagined that we would have finished speaking. Although I shall certainly close my current remarks anon, I am slightly tempted to detain the Committee through the night so that we could read tomorrow morning the text of the statement in the newspapers, and would not have to rely merely on my possibly misleading and hallucinatory version of the release.
It is interesting that the release is as ambiguous as could be. Ministers have told the press that they will keep the measure intact but that they will delay its introduction—mysteriously—from 1 July 2000 to 31 March 2001. With


your percipience, Dr. Clark, you may be able to detect a reason for doing that, but I must admit that, with my humble intellect, I am precluded. I have not the slightest idea why, if one is to retain the measure intact and not alter any major part of it, one would want to delay its introduction by nine months. If its purpose is to create a means of collecting
the correct—
we remember, that means an elephantine—
amount of tax,
why not introduce it early? What is the point of delaying the collection of this huge, correct amount of tax by nine more months? I cannot imagine that the Chancellor of the Exchequer has suddenly become generous in his old age.
It may just be—I hesitate to speculate—that the Government's real intention behind the delay is to think again, to tear up this noxious, ludicrous, misguided measure and to start again without admitting that they are doing so. If that is so, we will not be ungenerous. We will not taunt them. We will acknowledge that that was the right thing to do. All the Paymaster General needs to do this evening is to remedy a wrong measure, wrongly introduced through the wrong consultation process, with the wrong estimates of its effects, and with the Government wrongly pretending that they are not undoing it while possibly undoing it.
The Paymaster General can remedy all that at a stroke by saying tonight, in the House of Commons, where such things ought to be done, that she is sorry; that the Government made a mistake—we are all human—that they withdraw the measure; that they will table amendments to get rid of it; that obeying their own code of practice, they will carry out a proper consultation, consulting about the measure that they intend to adopt, rather than about the measure that they do not intend to adopt; and that they will eventually produce a sensible proposal that achieves whatever mysterious effect they were trying to achieve, other than to raise the correct amount of tax. If the Government do that, we shall thank them heartily.

Dawn Primarolo: I shall begin by responding to the hon. Member for West Dorset (Mr. Letwin), who broke the embargo on information that we forwarded to the Liberal Democrat and Conservative spokespersons in order to keep those on the Front Benches fully informed of the Government's thinking on the matter.
When the Finance Bill was published, it was announced that there would be further consultation on clause 102 between then and 19 April. Given that the debate had been called for this evening, it seemed appropriate to inform the House at the earliest opportunity of the Government's decisions in their consultations with industry. When I have dealt with that, I shall return to some of the points that the hon. Gentleman made in his opening remarks.
On Budget day two years ago—

Mr. Quentin Davies: Will the hon. Lady give way?

Dawn Primarolo: I want to set out the argument, then I shall give way to the hon. Gentleman. When the Government try to ensure that representatives of the

Opposition Front Benches are kept fully informed on an important issue, it is not helpful when that is used as a debating point at the Dispatch Box.

Mr. Davies: rose—

Dawn Primarolo: With all respect to the hon. Gentleman, no, I shall not give way.

Mr. Letwin: rose—

Dawn Primarolo: I am not sure which part of the word "no" the hon. Member for Grantham and Stamford (Mr. Davies) and his hon. Friend are having difficulty with. It might be the N or the O. I shall not give way until I have responded to the points made by the hon. Member for West Dorset.
On Budget day two years ago, the Chancellor announced that the Inland Revenue would carry out a review of the UK's system of double taxation relief for companies. That would involve a review of the functioning and the fairness of the existing system, its effectiveness in meeting the objectives of the relief, and business compliance costs, while having regard to the overall cost of the relief. I shall return to the question of cost.
Following extensive consultation with business, the Inland Revenue published a discussion paper on Budget day last year. Comments were invited by 30 September on the matters discussed in the paper and on other issues concerning double taxation relief. The Government carefully considered the points that were made by business, tax advisers and representative bodies during the review. Our decisions, together with draft legislation giving effect to them, were published on Budget day this year. A further period of consultation was allowed and we invited comments.
I note that the adviser to the Chancellor of the Exchequer under the previous Government, Mr. Troup, when giving evidence to the Treasury Committee on the double taxation changes, welcomed them. If hon. Members want chapter and verse for his remarks, I shall be happy to provide it.
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Having undertaken the consultation, the Inland Revenue and the Treasury have had a number of meetings with companies, tax advisers and representative bodies, such as the CBI. The Inland Revenue has addressed meetings that have been well attended, and a number of individual companies have discussed with the Treasury and the Inland Revenue how the double taxation relief changes will affect them. I cannot name them for reasons of confidentiality. To do so would mean identifying companies that have been using mixer companies in order to reduce their UK tax on low-taxed profits, or that have been planning to do so. The Inland Revenue and the Treasury have also received a number of letters from tax advisers and representative bodies.
The Government have taken on board all the comments and have made the following decisions. It has always been the Government's intention to allow companies a period in which to bring dividends to the UK and to claim relief for the underlying tax under the old rules. That is why the draft legislation provides for a start date of 1 July. Several


companies have asked for a longer period. They have pointed out, for example, the difficulties with minority shareholders in foreign subsidiaries, or with foreign restrictions on when dividends can be paid. The Government do not want those companies to be disadvantaged compared with others that do not have the same problems. They have therefore decided that the restriction on the relief for the underlying tax should come in from 31 March 2001.
Secondly, the schedule provides that, if a double taxation agreement expressly rules out credit relief for foreign tax, relief cannot be claimed under UK domestic law either. The amendment that we are making will ensure that provisions apply only in the case of future arrangements.
The provision that clarifies how relief for underlying taxes is allowed when a group of companies is taxed as a single entity in another country will be amended so that it applies whenever the foreign group of companies is in the ownership chain below the UK company and not just, as the draft legislation allows, where one of the companies in the foreign group is owned directly from the UK.
Finally, except in cases of abuse, the restriction of the amount of underlying tax for which relief may be claimed will not apply where the company that pays the dividends and the company to which it is paid are resident in the same country.
The Government remain committed to stopping the use of mixer companies to avoid UK tax on low-taxed foreign profits. The change extends the period for paying dividends into the UK under the old rules. The CBI welcomes those changes and will say so publicly. The Government have listened and discussion will continue.

Mr. Letwin: rose—

Dawn Primarolo: I wish to put the record straight with regard to the points made by the hon. Gentleman on consultation, cost, what has been advised on the consultation period and what we are doing with regard to the totality of the changes. When I have answered his initial questions he may intervene.
The Opposition want to focus on one small measure, but that is part of a package of double taxation relief measures, which, in many areas, gives businesses exactly what they asked for. The relief for foreign tax has been extended when overseas companies merge, allowing foreign tax to be carried backwards and forwards for use in another year. The Government have legislated for a number of practices to improve transparency and certainty with regard to relief. Other changes undertaken by the Government—the reduction in the corporation tax rates, the extension of group rules for losses and chargeable gains, the abolition of stamp duty on intellectual property, the consultation on tax relief for the cost of purchasing goodwill, the consultation on rollover relief for gains on disposable substantial shareholdings—have all been welcomed by business.
The accusation that the change to double taxation relief will make the United Kingdom uncompetitive does not stand up. Double taxation relief is only one consideration that companies take into account when they decide where

and when to set up their groups. The changes to double taxation relief need to be considered with the other elements in the package.
Let us consider the proposals on mixer companies and the controversy that has grown around them, especially on the Opposition Benches. The Government regard it as wrong that a group that holds overseas investments through an offshore holding company—and is therefore able to mix its subsidiaries' high-taxed and low-taxed profits—should able to obtain more foreign tax credit relief than if it held its investments directly from the UK.
The new rules will secure a fairer share of tax revenues for the United Kingdom; remove distortions in group structures, as groups will not be able to obtain more relief for foreign tax by adopting one structure rather than another; and remove distortions in investment decisions, as groups with low-taxed profits will be in the same position.
The previous Government knew all about those distortions. They acted in 1996 to prevent specific actions.

Mr. Letwin: Will the Paymaster General give way?

Dawn Primarolo: I shall not give way to the hon. Gentleman until I have answered his first series of points.
As soon as the previous Government shut the gate on artificially generated high-taxed profits, the avoidance industry was at work encouraging people to generate artificial low-taxed profits. In October 1998, in the full knowledge that the review of double taxation relief was in full flow, one adviser wrote an article in Accountancy, in which he referred to
the eccentricities of the UK's double tax relief system, which encourages UK groups to gain tax efficiencies by using offshore intermediate holding companies.
The writer expressed surprise that the take-up rate for such holding companies among UK multinationals was substantially less than 100 per cent. He noted that many groups earned most of their overseas income in high-tax jurisdictions. How, therefore, could a mixer system help them? The writer had the answer. He advised:
Intermediate mixer holding companies are appropriate even for these multinationals since low-taxed income may be generated within the intermediate mixer holding company itself for blending with the high-taxed overseas dividend income received. The low-taxed income can be created through establishing a tax efficient financing operation within the mixer company, which then on-lends its funds to other group companies by way of intra-group loans.
It is sad to say that we have evidence that some of the loudest opposition to the provision on mixer companies comes from companies that took that particular tax planning advice.
The Government have decided that such tax-driven distortions, which generate artificial high-taxed income one year and artificial low-taxed income the next, should no longer be a feature of the system. The new rules will also level the playing field between groups that have mixers and those that do not.
The current rules have the unintended effect of allowing other countries that maintain high tax rates to secure more tax revenues at the expense of UK taxpayers generally. They provide a subsidy from the UK to high-tax regimes.
The change will also make the UK's controlled foreign companies rules work better. The rules are designed to prevent multinationals from avoiding UK tax by diverting


profits to companies in tax havens and preferential regimes. Companies are exempt from the CFC rules if they pay back at least 90 per cent. of their profits to the UK as dividends. The assumption behind the exemption is that UK tax will be paid on the dividends and so there is no need to apply the CFC rules. However, mixing means that UK tax is often not paid on the dividends.
I cannot do better than to quote from an article published in the September 1998 edition of International Tax Review. It refers to mixer companies and says:
It is much easier to repatriate low tax dividends to the UK than ever before and this has made something of a mockery of the CFC regime. What does it matter being forced to repatriate low tax dividends if no additional UK tax is payable on them?
The far-sighted writer of that article was from PricewaterhouseCoopers.
The Opposition have said that we did not consult properly, but business has known all along that mixer companies were being considered in the review. It cannot possibly have been under any illusion that that was not the case. The matter was freely discussed at meetings, as tax advisers and the Inland Revenue have said. To confirm that, in September 1998, an article in International Tax Review speculated that an outcome of the review of double taxation relief would be restrictions on the use of mixer companies. It stated:
Those companies that are taking advantage of the famous "Dutch Mixer" are probably drinking at the last chance saloon. Legislation to seriously curtail the Dutch mixer could be on the statute books by 2000.
Guess which company the far-sighted writer of that article came from—PricewaterhouseCoopers.
Mixer companies were dealt with in the discussion paper that the Inland Revenue published 12 months ago. It identified all the issues that the Government have taken into account in announcing the change and noted that
the effect of mixing is to allow a United Kingdom company to have relief for foreign tax which is paid at a rate above the United Kingdom tax rate.
It stated that the principle of mixing
can constitute a tax-driven distortion of the way in which groups would otherwise structure themselves for commercial reasons
and added that mixing
can also encourage a group which has highly taxed income to divert investment to low tax countries, and vice versa …
As the hon. Member for West Dorset said, the paper concluded that mixer companies
present a number of interesting and complex issues of both an economic and a technical nature. It will be important for the future to strike the right balance …
The Government believe that the changes have achieved that balance.
In July 1999, the Inland Revenue ran a workshop for business on double taxation relief. The hon. Gentleman sought to ridicule and undermine that consultation process, but many supportive letters on the approach that it had adopted were received. One person wrote that he would recommend the Inland Revenue to extend the approach to other areas of taxation under review. Another wrote that the workshop provided an excellent format for taxpayers to understand the Revenue viewpoint and to express their own views.
In 1999, the writer of an article in Tax Planning International Review said that an
unusual feature of the review is the extent to which members of the Inland Revenue's international division have discussed it in open forum.
Hon. Members might think that views have changed since then, but that point was repeated by a different commentator in Accountancy Age on 30 March this year—after the Budget announcement. In September 1999, the chairman of the CBI tax committee told the Treasury that the review had been extremely well organised and that the CBI had felt able to participate in a full and meaningful way. As I have said, it will welcome the changes that the Government have announced.
I shall deal with the points about the Red Book, the calculations, whether the Revenue's figures are wrong and whether there is a dastardly plot in the Treasury. The total net yield from the double taxation relief changes is estimated at £100 million in a full year. The yield from the restriction on the use of mixer companies is estimated at £150 million to £175 million in a full year. I shall explain how the Revenue achieved that forecast; the hon. Gentleman is right that nothing is perfect, but it cannot be far off.
The Inland Revenue identified 1,000 groups that claim relief for underlying tax. About 600 do not use mixer companies and so are unaffected by the change because they hold their subsidiaries direct from the UK or do not have low-taxed profits on which they want to avoid UK tax. Half the remaining 400 have mixer companies whose purpose is to mix high-taxed and low-taxed profits on their way into the UK.
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The Inland Revenue reworked about 200 double taxation relief claims from the companies that would most obviously be affected by the changes. Those claims involved £1.5 billion of relief from underlying tax. The Inland Revenue calculated what the effect of the changes would have been on the claims, and then applied the calculation. The Revenue has explained the methodology at meetings with business and tax advisers, and it has been agreed that that is the correct way in which to proceed.

Mr. Letwin: Will the hon. Lady give way?

Dawn Primarolo: No.
Let us now consider the effect of widely varying high tax rates. We have not been allowed to see some of the calculations, or the assumptions on which they were based. We do not know where those concerned got their figures. I can, however, reveal some interesting facts relating to how much relief we already provide, which will put the amount that companies might lose into context.
We suspect that those making the calculations are doing some double counting. Some companies may appear on the top ten client lists of more than one firm of accountants. We believe that the groups involved are deliberately adopting a worst-case scenario by assuming that they will in one fell swoop bring back to the United Kingdom all their past years' low-taxed profits, when they would never have done so in other circumstances. That is totally unrealistic. We also believe that they assume that the companies will bring back to the UK the entirety of


their offshore profits every year. That is another improbable scenario, as was pointed out in an article in The Economist as long ago as 1 April.
It also appears that some companies are including in their projections tax that they would have expected to save as a result of schemes into which they had planned to enter, but which have not yet been established. We have seen examples of that over the last few weeks, and it confirms that the Government are right to act now.
Some people's forecasts of the extra tax that companies will pay fail the most basic credibility tests. About £4 billion of relief for underlying tax is allowed each year. The figures in some estimates are reaching the truly absurd. I am not sure whether this has been repeated, but an estimate of between £8 billion and £10 billion has been attributed to PricewaterhouseCoopers, although it denied that quickly when challenged. The restriction on the use of mixer companies would take away more double taxation relief than is allowed in the first place, which is nonsense.
PricewaterhouseCoopers claims to have identified 20 companies which, between them, will lose £2 billion a year as a result of the changes relating to controlled foreign companies and double taxation relief combined. As usual, we have not been told which companies are involved, or what assumptions were made in the calculations. Suffice it to say that the list alleges that five of the companies will lose £300 million each. That is remarkable given that, according to the latest figures available to the Inland Revenue, only two companies in the country—which may not even be clients of PricewaterhouseCoopers, and on its list—receive more than £300 million of double taxation relief in the first place. Alleging which will be the biggest losers and how much will be lost by referring to 20 companies when we know of only two that are receiving the relief puts the figures into perspective.

Mr. Edward Davey: Will the hon. Lady give way?

Dawn Primarolo: No, because I think it important for the figures to be put into perspective, so that hon. Members cannot distort the debate.
On Second Reading, the hon. Member for Arundel and South Downs (Mr. Flight) said that the mean of the forecasts of all the leading accounting firms was that the change relating to mixer companies would raise at least £3 billion. I am not sure whether the hon. Member for West Dorset repeated that figure today, but it, too, defies belief. It is fanciful to say that the change can take away three quarters of the relief for underlying tax that is currently allowed each year.
The fact is that the figures that have been quoted have not been substantiated. No methodology has been advanced. The figures that we have for companies claiming relief do not match those figures; a simple, straightforward attack is being made on the Inland Revenue and the Treasury.
The clause makes it clear that the Government have an active policy of encouraging competitiveness, of ensuring fair relations in our tax system and, moreover, of ensuring that companies, national or multinational, are free to take decisions about their structures according to commercial

viability, and not tax. For those reasons, clause 102 is the right place to make the changes and this is the right Bill for them to be in. Hon. Gentlemen simply have not got their facts right.

Mr. Edward Davey: That was one of the most defensive speeches that I have heard from a Treasury Minister. The Government realise that they are on the ropes on the issue. The U-turn that they have published tonight in the embargoed press release, from which the hon. Member for West Dorset (Mr. Letwin) read earlier, is only the first of the U-turns that I think they will be forced to make when they look at the damaging effects that the provision will have on British industry. If hon. Members sitting behind the Treasury Bench were taken in by the Paymaster General's arguments, let me throw some of those arguments back at her.
For example, the Paymaster General said that Mr. Troup, the adviser to the previous Chancellor of the Exchequer, told the Treasury Select Committee that the proposals were sensible, but she quoted selectively from his evidence. As a member of the Select Committee, I was there. I do not recollect that he was as supportive of the Government's position as she tried to make out. He said:
As far as the policy is concerned, there clearly was a mischief in what were called "mixer companies", which allowed companies with tax bills overseas effectively to buy in low-taxed income to shelter their profits,
but he went on to say:
Whether it is the right way of doing it I think is more questionable. I think that this can be characterised as a sledgehammer.
He went on:
The change in the behaviour is likely to be a reduced remittance of dividends to the UK—
exactly the point that the hon. Member for West Dorset made. Mr. Troup concluded his remarks by saying:
I am concerned as to the effects on investment decisions and on location decisions and I am concerned about the way this policy has been brought through.
The Paymaster General tried to quote Mr. Troup in support of her arguments. If she had quoted from him extensively, she would have shown that he was against the policy that the Government have been advocating tonight.

Mr. Letwin: rose—

Mr. Davey: I give way because I believe that this is a debate.

Mr. Letwin: In contradistinction to the Paymaster General, the hon. Gentleman has no reason to fear giving way. Does he agree that it is not remarkable that she misquoted Mr. Troup, because she misquoted her own Inland Revenue consultation document?

Mr. Davey: The hon. Gentleman is exactly right. There were many mistakes in what the Paymaster General said. We will look at Hansard, just as he looked at the Second Reading debate. Later, we will use her arguments against her and prove many of them to be totally fallacious. Again, the example that she gave with respect to the amounts of money that could be taken out of British


industry seemed to be deliberately misleading, or perhaps I should say unintentionally misleading, Sir Alan, to keep within your constraints.

Mr. Beard: Will the hon. Gentleman give way?

Mr. Davey: I will when I have made the point, if the hon. Gentleman will bear with me.
The Paymaster General suggested that only two companies currently get the relief at an amount above £300 million per annum, but presumably she was using past data—data on tax returns for 1989–1999. Presumably, tax accountants are not using past data. They are examining the current tax year and future tax years, understanding their clients' business. That is why there are likely to be different estimates and, indeed, why those accountants cannot share that information with the Government; that would break the confidences of their clients. The Government must decide whether they will work with industry, consult properly and trust industry—which, they claim, they are trying to work with elsewhere—to build the economy, or whether they are trying to punish it.

Mr. Beard: My right hon. Friend the Paymaster General has dealt with that point in detail. She said that the Inland Revenue undertook an exercise involving all companies to which the legislation would apply and that it had worked through half of those 400 companies to try to work out the implications of the legislation. That is the source of the figures that my right hon. Friend gave, which are orders of magnitude lower than those that have been quoted elsewhere. The Government have used a perfectly respectable method of approach to the problem. We have heard nothing of anybody else's approach and no reason why that approach should be objected to.

Mr. Davey: I am afraid that the hon. Gentleman was not listening to the Paymaster General as carefully as others of us were. I understand that she was talking about historic data, not the projected data which are being quoted in the newspapers.

Mr. Letwin: I am grateful to the hon. Gentleman for giving way. He may have noticed that at that juncture—one of many—I tried to intervene on the Paymaster General in order to ask her whether, at the meetings to which she referred, it was the case, as I have heard from people who were present, that it was pointed out to the Inland Revenue and the Treasury that the base year that they were using was exceptional and hence misleading. Does the hon. Gentleman agree that it would be useful if the Paymaster General answered that question? Was that pointed out to them?

Mr. Davey: It would indeed be useful if the Paymaster General answered that question, but I fear that she will not, and that is a problem. It was very noticeable and should be on the record that the Paymaster General refused to take interventions from the hon. Member for West Dorset and myself, thereby reducing the quality of the debate and the ability of the House to get to the truth. If a Treasury Minister is not prepared to take detailed interventions on a matter of this importance, the House is

in a truly awful position. We need proper debate so that we can get to the truth. The Minister ought to be able to take cross-questioning.

Mr. Beard: I thank the hon. Gentleman for giving way to me again. He has not said what criticism he has of the methodology that my right hon. Friend the Paymaster General has set out. We have heard only the vague comment that the Government picked the wrong starting date [Interruption.] The hon. Member for West Dorset (Mr. Letwin) is shouting from a sedentary position, but the sources that he quoted espoused figures ranging between £200 million and £8 billion. On what grounds does the hon. Member for Kingston and Surbiton (Mr. Davey) object to the methodology that my right hon. Friend has quoted as the basis of the Treasury estimates?

Mr. Davey: We have touched on that. I am glad that the hon. Gentleman intervened for a second time to enable me to make the point yet again. Taking one exceptional year is not the best way of making the calculation. If the Government want to make the calculation properly, they should take several years and use averages and work with accountancy firms and the firms concerned to produce a more accurate figure—[Interruption.] Rather than shouting from a sedentary position, the hon. Member for Bexleyheath and Crayford (Mr. Beard) should let me finish.
The Liberal Democrats are arguing that the Government should halt the progress of the legislation and engage in proper and full consultation with business to produce the exact and accurate calculations that the hon. Gentleman seems to want the Government to carry out. It appears from the way in which the debate is proceeding tonight that those figures have not been properly produced, and we need them. British industry needs them so that it is not penalised by the legislation.

Mr. Beard: Will the hon. Gentleman give way?

Mr. Davey: No. I have already given way to the hon. Gentleman twice, which is more than the Paymaster General did.
We need to look at the wider implications of the measure. British and multinational companies are increasingly concerned about the way in which the Government go about tax legislation and consultation on potential tax changes. It is a serious matter. If we are to attract investment into the country, whether it is from companies operating in Britain or from Britain, we need to ensure that those companies can feel confident that they will be operating under a relatively stable and predictable tax regime, not one that will suddenly change without due consultation or proper analysis.
Presumably, the objectives of achieving stability and ensuring proper analysis lay behind the code of consultation itself. That is why the code of consultation offers a very sensible way of improving our tax system. The problem—as the hon. Member for West Dorset so eloquently explained to the Committee—is that the Government have not abided by their own code.

Mr. Letwin: The hon. Gentleman is making a serious point which I perhaps omitted to stress sufficiently. Does he agree that, even if the Government were to return with


the same damaging measure after a proper re-consultation of the type that he and I advocate, such action would at least do something to restore multinational corporations' now very damaged confidence in the Government and, much more importantly, in the United Kingdom?

Mr. Davey: The hon. Gentleman is right—it would restore at least some confidence. I think, however, that that confidence has been quite badly shattered already, and that the damage has been caused after the introduction of other damaging measures, such as abolition of advance corporation tax, which I wanted to debate earlier. The Government's actions are beginning to suggest that there is something old Labour about the Administration. I was talking to one business man who described clause 102 as being akin to something that the hon. Member for Brent, East (Mr. Livingstone) might have wished to introduce. The measure is a deliberate attempt to target and attack multinational corporations.
The hon. Member for West Dorset did the Committee a great service in his excellent speech, which was a tour de force on a rather complicated matter. He dealt with the matter with far greater precision than I feel that I am able to apply to it. However, although he analysed the possible motives behind the measure, he may have missed out one motive, which is that the measure is simply a knee-jerk reaction and ideological attack on a part of British industry. That would be particularly worrying. Nevertheless, the Government say that they want to talk to business and to understand business. The Labour party even says that it wants to be the party of business.
I think that, if they have not already done so, the businesses that will be affected by the measure should contact No. 10 Downing street. I do not believe that the Prime Minister is particularly happy with this type of measure. As the architect of new Labour, he should be concerned that such measures will undermine everything that he has been attempting to do with the Labour party.

Mr. Oliver Heald: He should be told.

Mr. Davey: This is a very serious point. I hope that the Paymaster General will tell the Committee whether she has had proper and full discussions with the Prime Minister about the implications of clause 102 and schedule 30 for British industry, and perhaps for the relationship that British industry will in future have with the Labour party. British industry—composed of small, medium and large businesses—is increasingly fed up with the way in which the Government are going about their business. British industry has grave concerns.
Ministers have to realise that capital is increasingly mobile, and that—despite the potential capital gains liabilities that the types of firm hit by the measure may have in one particular year—those firms will realise that, in the long run, it is cheaper to move abroad. Worse, the measure will alter the investment decisions made by those firms on all their portfolio. The measure really is profoundly affecting the way in which both British and multinational businesses are going about their work.
I urge Ministers not simply to rush out a press release that looks as if it has been cobbled together not after a full consultation but after a rather short consultation,

saying that they will delay implementation of the measure, perhaps thereby helping a few firms. I hope that the Government will go much further and say that they will fully re-consult British industry, think again, and return to the House with other measures that will tighten up on abuse—if there is abuse; I do not think that the Paymaster General has very effectively made the case that there is—but not threaten the underlying health of many of the United Kingdom's greatest companies.

Mr. Beard: I think that the quality of debate from Opposition Members tonight has been as low as I have ever heard it. That is well evidenced by the call for greater consultation on the basis of nothing more than tittle-tattle in back rooms which does not stand up against the analysis given by my hon. Friend the Paymaster General.

Mr. Letwin: I am sorry to interrupt the hon. Gentleman so early in his speech, and it is gracious of him to give way at this point. However, I do so because he referred to tittle-tattle. Does he think that the commentary from the CBI, the Institute of Directors, the Chartered Institute of Taxation and six of the major world accountancy firms counts as tittle-tattle?

Mr. Beard: We have already heard from my hon. Friend the Paymaster General the extent of the consultation that has taken place, including that with the CBI. The arguments put earlier by the hon. Member for West Dorset (Mr. Letwin), particularly those about the financial impact on these companies, were little more than tittle-tattle. He has not produced one scintilla of evidence in the whole debate to justify any of the excessive numbers that he mentioned. The nearest he came to a fact was to say that the starting date for my hon. Friend's analysis was not the one that he would have chosen.

Mr. Jack: Could the hon. Gentleman assist my memory by citing either the document or the paragraph in a document in which the clause was the subject of detailed scrutiny and consultation?

Mr. Beard: The document in which that appears is the Finance Bill, and it is also in the explanatory notes. There has been wide consultation. As my hon. Friend said, nobody who had considered the Inland Revenue document on double taxation relief for companies and other documents over a period of 18 months could have been unaware that such an issue would arise. My hon. Friend has outlined the discussions that have taken place in recent weeks and months.
When Mr. Troup gave evidence to the Select Committee on the Treasury, he said that he believed that there was mischief involved in mixer companies, yet he has been quoted as though he were antagonistic towards the Government's proposals.

Mr. Quentin Davies: Did the hon. Gentleman pay attention to the speech of the Paymaster General, whom he is now so gallantly trying to defend? If he did, he would have noticed that she cited a whole range of documents, newspapers, tax experts and some Inland Revenue documents, but not a single Government document that referred to the possibility of abolishing mixing relief.

Mr. Beard: My hon. Friend was at that point quoting the people who had been consulted, and their responses.


She was therefore not likely to quote a Government document that outlined what had already been said. [Interruption.] The hon. Member for West Dorset has spent most of the evening convulsed with amusement. I cannot see that the joke is other than on him for having made such a to-do about something, when the nearest he has come to any serious purpose has been to talk Britain down. That seems to be the hallmark of those on the Opposition Front Bench. The hon. Gentleman spoke with some satisfaction about the number of companies that will be transferring their headquarters from Britain. He seemed to delight in talking Britain down. Earlier, he regaled the Committee with his own qualifications. If those qualifications are to be used to prop up his arguments, perhaps he should use those arguments to a more constructive end than trying to destroy a policy that is in the country's interests.
The other allegation that the hon. Gentleman made was that the purpose of the measure was uncertain. As has been said, one purpose is to secure a fairer share of tax revenues for the United Kingdom, by more effectively limiting the relief available for foreign tax paid. There is no doubt that countries that maintain higher rates of tax revenue do so under the mixer arrangement at the expense of United Kingdom taxpayers. It is a strange party that, in the European debate, talks of sovereignty and of foreigners taking our sweets off us, but is willing to tolerate such a position on tax being refunded to the UK.

Mr. Letwin: rose—

Mr. Beard: I will give way in a moment, but I wish to continue with my list.
The pretence was that there was no purpose in the provision and that it was there merely to damage the United Kingdom, or almost; it was the red saboteurs—the parliamentary equivalent of the ones outside. That was the level of the speech, and it needs knocking.
Another argument, which must be taken seriously, is that the present arrangements cause a distortion in group structures. Many companies are induced to have these pseudo-subsidiaries—the mixer companies—when they do not need them for any management purpose. There is no reason in logic, business or taxation why we should give preference to that sort of grouping, arriving at one sort of arithmetic, compared with the direct refunding of profits under the system that is proposed.
Those distortions carry through to the investment decisions that British companies are taking. The tax system ought to be neutral in that respect. It ought not to be perverting investment decisions so that they go one way rather than the other, but that is one of the impacts of the present arrangements that my hon. Friend the Paymaster General discussed.

Mr. Letwin: Does the hon. Gentleman agree that it would be of some advantage to the United Kingdom if it had a regime that was sufficiently competitive to enable some multinationals to be headquartered here so that they paid some tax here? Does he recognise that I was maintaining a certain level of humour because had I not done so, I might have expressed the anger that some of us feel about a measure that, because it is so misguidedly

trying to raise revenue, will have a lasting negative effect on the UK economy, which neither this Government nor their successors will be able to remedy for decades.

Mr. Beard: The position that I detect from the hon. Gentleman's theme is similar to the one he adopted when he dealt with the previous theme—indeed, it resounds through the Opposition. It is to be on the side of anyone who is relieving businesses and other people of tax. In this case, we are seeing a last-ditch stand to defend a Government of 20 years who were lax on the tax system against a Government who have come in and are trying to put it right. The indignation of the hon. Gentleman and many of those who are complicit in the exaggeration of the impact of these measures is well summed up in, I think, George Bernard Shaw's aphorism that there is nothing more indignant than a vested interest masquerading as a moral principle.

Mr. Dorrell: I begin by declaring an interest as a director and shareholder of a company that operates with foreign subsidiaries, some of them held through intermediate holding companies. I have some personal involvement in this issue.
I congratulate my hon. Friend the Member for West Dorset (Mr. Letwin) on a skilful presentation of the case. The issue is important because of its possible impact on tax revenues. It is much more important because of the disincentive that it introduces into our tax system for large multinational companies to locate their head office functions and, importantly, intermediate head office functions on UK soil. So, for all the reasons advanced by my hon. Friend, I hope that the Government will withdraw this proposal, reconsider how to set about the taxation of foreign dividend flows into the UK and undertake a proper consultation on whatever proposals for legislation they then introduce.
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We all know that some anti-avoidance legislation needs to be introduced without consultation so that its effect is not nullified by people acting in advance of the effective date of the new law. However, the Government realise that this proposal is not one such. Today, they announced that the effective date of the new law is to be delayed until March next year, so there is no need to proceed without proper consultation on the proposal.
It is crystal clear that there has not been sufficient consultation on the precise implications of the Government's proposal. Given everything that has been said, it is incumbent on the Government to reconsider the matter. They should then hold proper consultations on their precise proposals for legislation. I hope that that is the lesson the Government will draw not only from this debate but from the wide public discussion of this badly thought out proposal.

Mr. Letwin: My right hon. Friend speaks with the authority of a former Financial Secretary to the Treasury. Does he agree that if there is an abuse such as that which has been identified on transfer pricing or cross-lending from low-tax subsidiaries, the appropriate method for dealing with it would be the onshore pooling that was the


subject of the consultation paper? There is a means to deal with any feared avoidance of that type; the Treasury could go back to that.

Mr. Dorrell: I agree with my hon. Friend. Given the choice between the offshore mixers that have developed and onshore pooling, I should have a strong preference for the latter. One reason for that is because the one point made by the Paymaster General with which I agreed was that the combination of the controlled foreign companies legislation and offshore mixers is a genuine abuse. The Government are on strong ground if they want to address that aspect of the problem. However, their difficulty is that in dealing with that genuine abuse, they have created a much bigger problem than the one they set out to solve.
It is important for the Committee briefly to remind itself that, in an increasingly globalised economy, not only huge multinational companies but a broad range of British companies have foreign operations in various parts of the world, trading under tax regimes whose rates are different from those in the UK. The question the Committee must address is whether British-based companies which earn profits in other parts of Europe or the world—including the developing world—and pay tax in those countries at rates determined by their national Governments, should, if the management choose to bring the after-tax profits back to the UK as dividends, pay an extra tax yield to the UK Exchequer.
Some countries—Holland is a major one—make no claim whatever to tax dividends from earnings that are fully taxed in overseas territories. In a globalised economy, a strong case can be made that, if revenues have been taxed overseas, the repatriation of those revenues to the host country as dividends should lead to no further taxation obligation. That is the Dutch position.
The traditional UK position has been that we claim to tax those flows, but we make that claim only if the average rate of tax paid overseas is lower than that paid in the UK. That has been the effect of the mixer company.
What the Government have now moved to—uniquely among 67 countries, as my hon. Friend the Member for West Dorset rightly said—is the proposition not that we should allow that averaging process to take place through mixer companies, but that any British-owned company that earns revenue anywhere in the world, pays tax to the appropriate national Government at the rate that that Government deem sufficient and then repatriates the revenue to the UK ought to pay a marginal tax rate to the UK Exchequer if the tax paid where the profit is earned is lower than that set by the UK Government. I do not believe that that is correct as a matter of principle, but if the Government insist on legislating for such an arrangement it will be hugely damaging to the UK's role as a command control tower for international companies operating in different parts of the world.
There has been a long discussion in the newspapers—we have heard more of it this evening—about whether the tax yield will be £175 million, as the Paymaster General said, or £3 billion, as PricewaterhouseCoopers has suggested. I draw two conclusions from that argument. First, as the hon. Member for Kingston and Surbiton (Mr. Davey) said, it underlines the case for a proper consultation. It is absurd that we can be discussing the

introduction of a new tax law when we, the people's representatives, do not know whether the effect will be to bring in £175 million or £3 billion.
To be honest, the second conclusion reinforces the Government's position rather than some of the things that my hon. Friend the Member for West Dorset said. I simply ask myself what course of action the management of a company are likely to take when faced with a choice between bringing earnings from the place where they were earned back to the UK, and therefore paying a substantial tax bill to the UK Exchequer, and taking those earnings to an intermediate holding company in some other country where they will not have to pay tax. It seems overwhelmingly likely that unless the revenue is essential for paying further dividends to UK shareholders, companies will choose to take the revenues to overseas holding companies. That will not produce a huge tax revenue to the UK.

Mr. Letwin: My right hon. Friend is advancing a serious argument that may be absolutely right for many companies. Does he agree that in respect of those about which, as an economy, we may be most concerned—market leaders quoted in the UK—the necessity to have dividend remittances here may be so great that they will none the less ante up?

Mr. Dorrell: My hon. Friend is right to suggest that some companies will have no choice. The principal reason for that will be to pay dividends to UK shareholders. It is entirely possible that many UK shareholders, when faced with the choice between the company paying a substantial tax bill to pay the dividend to them and the company using the money for a different purpose, subject to a lower tax rate somewhere else, will be receptive to the argument that the money be paid to a holding company.
I want to develop the argument a stage further. The likely result in the majority of cases will be that money will not come here and be subject to tax, but will be taken overseas into intermediate holding companies. People may say, "So there we are. That is the end of the story. No one is any the poorer." That is not how it is. If companies start to develop overseas holding companies to which they pay dividends, they will need to manage those dividend flows in those countries, and the holding company function that ought in British interests to be located and developed in Britain will be developed and built in other countries that have more benign treatment of foreign dividend flows.
This Government are developing a policy that is the precise opposite of the intelligent tax policy that would be proposed by a Government who want to be competitive in attracting investment and high-value management functions into the UK, so that the UK becomes a holding company centre and plays a leading part in a developing market economy. They are creating a tax policy that will encourage the growth offshore of high-value management functions. It will relegate the UK to the margin so that it will simply be a responding economy to an overseas holding company function.
That prospect will be hugely damaging in the long run. I do not pretend that it will produce dramatic, overnight damage to UK interests, but it is an important step in precisely the wrong direction. I very much hope that the Government will listen to the force of the argument that


has been made against the proposal, take the proposal away, and reconsider and consult on it properly this time before they bring it back for legislation.

Mr. Jack: I am delighted to support my right hon. Friend the Member for Charnwood (Mr. Dorrell) and others who have spoken in the debate. One of the things that worried me about the Paymaster General's line of analysis was a somewhat scatter-gun passage in her defence of the proposal. She seemed to say that, because the Government had done everything that they had been asked to do on a whole range of domestic corporation tax and company tax issues, that made the proposal in the clause in some way okay.
If we follow that argument, we reach the first line of weakness in the Government's substantiation of the proposal. In the justification of the Government's position on the clause, we have not been offered any overall economic impact analysis. They justify their position through an argument in which the tax tail appears to be wagging a big dog—and the tax tail is of uncertain size. We are told that the Inland Revenue has analysed 200 companies, but we have not been given for public view an anonymised report on that, so how do we know whether the Government's argument is realistic?
During my time in the Treasury, some of the numbers that I was given about policy effects were questionable. Therefore, they were re-analysed and sometimes one agreed with them and sometimes one did not. However, one learned that there was an element of uncertainty in the forecasting process. I shall not indulge in saying which forecast is right or wrong, but I will say that an argument that comes from an uncertain sample of companies with no overall economic impact study is a dangerous point from which to start in, as my right hon. Friend rightly said, a world of highly competitive global capital flows.
I sat down with a company that was exercised by the proposal, but I shall retain its anonymity because it shared with me confidences about its proposed retail expansion plans in mainland Europe. It explained to me how its investment proposals operate under the present arrangements and how they would be impacted upon by a measure that will end the mixing arrangements. It pointed out that a flow of initiating capital went from the United Kingdom to the foreign subsidiary company and was then deployed to develop profitable investments in different parts of Europe.
Why did the company do that? It had its responsibilities to shareholders, but it was equally aware of the activities of its competitors in the same sector who deployed competitive measures not only in mainland Europe, but with the potential to develop them in the UK. To put it at its crudest, it was hand-to-hand fighting to develop competitive investment in Europe. The company deployed the mixing arrangement to ensure that it remained in parity with its European competitors in terms of the taxation on its dividend and interest flows, given the circular situation in Europe.
10 pm
We are talking not about some grand world tax jamboree but of a model of a United Kingdom-based company which was seeking to develop profitable investment in Europe to maintain its competitive position against its European competitors.
In the Paymaster General's analysis, she talked about the right or correct level of tax, as if a new equity concept, which I do not recognise, were being created. If the company to which I have referred is not able to be tax competitive with its competition, that will affect its overall viability, and potentially its overall tax condition. I see that the Paymaster General is starting to look somewhat bored. I listened with great care to what she had to say to justify her defence of the Government's position. I hope that she will be able, either tonight or in subsequent discussions in Standing Committee, to respond to these points.
I am not talking about a gigantic multinational company. It is an international company that is seeking to trade competitively. Clearly, the Government's proposals will undermine its position. I accept that my example is perhaps one of many, but it comes from the real world and so far we have heard nothing from the Treasury Bench about how that world operates.
I was glad that the Paymaster General was able to announce that the starting of the process would be delayed. The company that I have talked about and other organisations that have made representations to me, including the Chartered Institute of Taxation, agree that a delay is required. In praying in aid her position, the hon. Lady said that there had been a successful Inland Revenue-run workshop, in which many double taxation arguments had been discussed. I issue her a simple challenge. Is she prepared to authorise the Inland Revenue to arrange another workshop in the intervening period, so that the protagonists can have an open discussion with the Inland Revenue and the Treasury to explore the economic, practical and real-world impacts? [Interruption.] If I heard the hon. Lady correctly, she said from a sedentary position that she refuses to do that.

Dawn Primarolo: indicated dissent.

Mr. Jack: I am delighted that the hon. Lady's body language is rather more positive than the words that I half overheard.
If the hon. Lady is truly confident of her position and she believes that no damage will be done to the competitive position of British companies, which are merely seeking tax parity with European investment and competitive positions, she should have no hesitation in inviting companies to a workshop to explore the Government's proposal.
The Government have a big majority and they know that, if they want to, they can have their way. That worries me. However, a big majority and a head-down and blinkers-on attitude towards tax do not make for good tax law. I should know because in certain instances when I was a Treasury Minister we wrote some bad tax law.

Mr. Giles Radice: No!

Mr. Jack: This may be the opportunity to respond to the brayings of the right hon. Gentleman. I admit that when we were having to do things in a rush, some things went wrong. We had to put them right. We now have an opportunity to stop wrong things being done by providing for a little more open consultation and discussion so that we can verify the economic impact of the Government's proposals on the United Kingdom, and put aside for one


moment the difficult debate on the moneys that may be raised from the revenue derived from the provisions in clause 102.

Mr. Letwin: I thoroughly agree that making an economic impact assessment is much more important than the mere question of the fiscal effects, as my right hon. Friend the Member for Charnwood (Mr. Dorrell) mentioned. However, does my right hon. Friend accept that it is essential to talk to major companies deciding whether to site their intermediate or ultimate company headquarters here or elsewhere to discover how that would affect their choice?

Mr. Jack: My hon. Friend makes a useful and powerful point that supports the remarks of my right hon. Friend the Member for Charnwood. In all sincerity, I ask the Government to consider the assessment, which is a simple and practical way of resolving a complex matter. I, for one, do not want large numbers of companies, whether small, medium, large or multinational to be significantly disadvantaged in the competitive world of international taxation as a result of the Paymaster General pursuing a concept of correct or right taxation to the exclusion of its competitive impact on British companies.

Mr. Quentin Davies: I remind the Committee of my interests as declared in the Register. As far as I am aware—although I have been almost deliberate in not finding out—the firms with which I am associated are not directly at risk from the Government's proposals.
I congratulate my hon. Friend the Member for West Dorset (Mr. Letwin), the shadow Financial Secretary, on a brilliant forensic devastation of the Government's case, which was suffused with Ciceronian irony. I am sorry that the hon. Member for Bexleyheath and Crayford (Mr. Beard) failed to grasp that, but the rest of us enjoyed it enormously—with the possible exception of the Paymaster General, who was the target of his devastating analysis.
My hon. Friend made a case against the Government on three counts. The first is far and away the most important. The significance of it goes way beyond the issues that we are discussing this evening and the matter of tax law. My hon. Friend brought forth documentary proof, no less, of a matter that several of us have been raising for a long period—since the election. The Government are profoundly indifferent to Parliament and systematically treat it in a disdainful and frivolous fashion, documentary evidence of which can now be seen in the press release, apparently embargoed until 10 o'clock, in which the Government announce a series of changes—including some totally inadequate concessions—on the matter under discussion.
That demonstrates a double contempt of Parliament. First, the press release makes it clear that the Government are not interested in what Parliament has to say on the matter. They had decided the matter and were going to make an announcement this evening, making plain that that announcement could not be influenced by what might be said in our debate. One cannot get much more contemptuous than that.
Secondly, the Government clearly took it for granted that their proposals would be endorsed by the vote in Committee. That is as much—indeed, even more—of an

insult to Government Members and their docility as it is to the sovereignty of Parliament. We have seen many signs of the Labour Government's insidious attitude towards Parliament and the fundamental responsibility of the Executive branch to be accountable to Parliament. We have not seen before the sort of dramatic documentary evidence that my hon. Friend introduced in Committee this evening, for which we should all be grateful.
Against that background, it is not surprising that my hon. Friend exposed, quite incontrovertibly, the Government's mockery of the consultation process. The Inland Revenue has clear rules for consultation and, apparently, a consultation process on the issue of double taxation relief and corporate taxation was launched. However, at no stage during the course of that proceeding did the Government reveal what they actually proposed to do. Therefore, a mockery of a consultation exercise was held in which all sorts of proposals were discussed except those that the Government intended to introduce in the Finance Bill. That was no consultation at all. The Government underestimate the intelligence of Members of Parliament and the public if they think that they can get away with that.

Mr. Letwin: Does my hon. Friend agree that there is an even more remarkable aspect to the consultation? The final date for responses to the consultation process was, if memory does not deceive, September last year, and the measure was introduced in March this year. Therefore, even if, in the interim, the Government had changed their mind, there were some months in which the consultation exercise could have been repeated, on a new basis.

Mr. Davies: The Government are clearly guilty as charged on this most serious allegation.
The Paymaster General more or less accepted the charge against her when, in her speech this evening, she quoted various speculative press articles that apparently had succeeded in foreshadowing some of the measures the Government intended to present to the House. In no circumstances can a speculative press article be a substitute for consultation. If the Government of this country are in the process of consulting the public on a specific legislative proposal and it so happens, coincidentally, that The Sun, The Mirror or some other publication carries an article about a possible course of action that the Government might adopt, it cannot be argued retrospectively that that speculative article formed part of the consultation process and that those who were engaged in the process were supposed to respond to the speculative press article during their discussions with the officials who took part in the charade.

Mr. Letwin: My hon. Friend reminds me of a point on which I attempted to intervene on the Paymaster General, although, with her customary graciousness, she failed to give way. Does he agree that it was pretty remarkable that, when the hon. Lady quoted one source as having congratulated the Government on their measures after—as she said and as I believe the record will show—the Budget was introduced, she referred to an article published in one of the journals on 30 March? Does he


agree that it is pretty unlikely that someone could get published on 30 March an article that was written after a Budget that was itself produced after 20 March?

Mr. Davies: My hon. Friend's case is made. During our exchange, there has been complete silence on the Government Benches, and the Paymaster General herself has attempted to hide her embarrassment by sinking her head into her brief.
Our case is a serious one whose importance far exceeds that of any decision that we are likely to take tonight about the taxation of corporations in this country. This evening, we have seen revealed, in all its hideous ugliness, the naked arrogance of Executive power. A low point has been achieved under the Government and the situation gets worse every day, but this evening we have witnessed the most dramatic demonstration yet.
Let me now turn to the substance of the tax proposals before the Committee. One has to start by recognising that there is an apparent anomaly and unfairness in the system of double taxation relief in that, under double taxation agreements, residents of this country are given relief for foreign tax that they have already paid in countries with which we have such an agreement, provided that the rate of tax paid is equal to, or less than, the prevailing rate of tax at which they are assessed in this country, but if they are taxed abroad at a rate of corporation tax that is higher than the rate in this country, they receive no relief for that excess. One might think that that is not even-handed. However, if, under double taxation arrangements, a country were to relieve completely any tax paid under a foreign jurisdiction, it would not only lose revenue, but would be subsidising foreign countries that chose to establish higher rates of withholding or corporation tax, and that would be a perverse thing to do.
10.15 pm
I now come to a technical error that the Paymaster General made in her speech, which pales into insignificance when compared with the constitutional errors that I am afraid she and her Government have perpetrated tonight, but is important. She told the Committee that a system of offshore mixing to secure an average rate of taxation on which relief would be available in this country would itself induce, or provide a subsidy for, foreign countries to tax at higher rates. That is not true. She was confusing a situation in which we relieve all foreign tax with a system of pooling or of mixing, when the tax rates are averaged out.
A British company that establishes an offshore mixing company clearly has an incentive to ensure that the average rate of tax that is incurred is as low as possible. Therefore, it has an interest in resisting investment in countries where the rate of tax is higher. So it is not true that, in an offshore mixing company, the present system—the status quo—creates an incentive or subsidy for foreign countries that tax more highly than we do. I hope that the Paymaster General will think through what she has said because that error may have led her seriously astray in drafting the proposals before us.

Mr. Letwin: Does my hon. Friend agree that it is extraordinary that the Minister who made those remarks

chairs a committee on so-called harmful tax competition, in which she effectively takes exactly the opposite position—that tax competition is helpful and not harmful?

Mr. Davies: I hope that my hon. Friend is right to say that the Paymaster General views tax competition as helpful and not harmful, because it is essential that, in the European Union or, indeed, generally in the world, we retain some competitive pressure on Governments to hold back their inclination to tax and to spend as much as possible. Tax competition seems to be an extremely benign force. I hope that he is right to say that the hon. Lady is fully persuaded of its importance.
I do not want to sit down without having dwelt on the most important flaw and error in the Government's thinking on the matter. It is a rather naive error to discount entirely the behavioural consequences of such a major change. It does not make the slightest sense to anybody who has had the remotest experience of business life to suppose that one can change anywhere in the world the rules under which multinational companies are taxed without any consequence for their structure or organisation. There will of course be behavioural consequences.
It is not possible for someone who is paid to run the tax department of a major multinational to receive the news that there has been such a significant change and not to recommend to his board any consequent changes in the structure or operation of that company. It is not possible for any director of that company who is doing a proper job for which he or she is paid not to respond to such a recommendation and not to do what rationally is in the interests of the company in the light of the changed circumstances.
It is possible to distinguish between the possibilities that will be open to companies now that the opportunities of running an offshore mixing vehicle are about to be abolished. One would be not to repatriate dividends in order to pay a dividend from a UK company to UK shareholders when necessary, but to borrow instead. That of course implies extremely inefficient cash management and costs that any responsible company would be reluctant to incur. It implies a change in the gearing of that company, which would be resisted by professional managers in any company that is properly managed.
It is fairly unlikely that that course will be adopted. Companies will find ways of not repatriating the dividends at all. As my right hon. Friend the Member for Charnwood (Mr. Dorrell) said, the natural inclination will be to keep those profits offshore and use them to fund other investments. That means that the total dividend flow into the UK will be less than it otherwise would be. I draw the Government's attention to the fact that we have a current account deficit, which is growing. It will grow further if dividends are not repatriated to this country.
Then there are the second-line effects to which my right hon. Friend the Member for Charnwood referred. Companies are accumulating more cash abroad and are making investments abroad. They will increasingly be drawn into setting up administrative structures abroad and perhaps incurring costs abroad, by switching research and development abroad or some other cost that can relatively easily be transferred. That will result in the loss of employment—possibly valuable employment—and the loss of high-value added activities to this country. That is not a good day's work for any Government.
Finally, what concerns me about the proposal is the opportunity costs. I have not heard that term used once this evening. It seems that the Government have not even considered the opportunity costs. I assume that, if the hon. Lady had asked the Revenue to do a study of them, we would have heard about that this evening in her long apologia. I assume that no one has examined opportunity costs, which are the essence of the matter.
We are speaking about future decisions about the location of investment, the location of headquarters, and the right locus for the incorporation of companies. The debate is being conducted at a time of unprecedented international merger and acquisition activity. As we know, particularly within the single market but not limited to the single market, there have been an enormous number of major mergers between multinational companies. Some have been mentioned this evening. My hon. Friend the Member for West Dorset rightly drew attention to Vodafone Mannesmann, which is the biggest involving this country, and there have also been British Steel and Hoogovens, now called Corns; AstraZeneca; and SmithKline Beecham and Glaxo. In a few weeks, there may be Lafarge and Blue Circle.
There is a list of such enormously momentous acquisitions or mergers in progress. On every such occasion, the decision will have to be taken by the two parties where to locate the new operation, where it should be headquartered, how it should be structured, who should hold the subsidiary companies, and through what vehicle. The Government have chosen this precise moment to make a destructive attack on the attractions of this country as a locus for the headquarters of such emerging multinational companies. There can be no worse incompetence than that.
We have seen an amazing display this evening by the Government, on the one hand of arrogance and abuse of our constitution, and on the other hand of neglect of the fundamental economic duty of the Government to promote a framework in which future investment, employment and growth in this country are maximised.

Mr. Letwin: I shall not long detain the Committee. I am sure that hon. Members are grateful for that.
The hon. Member for Kingston and Surbiton (Mr. Davey) made clear in his speech much that is important about the wrongness of the process in which the Government are engaged.
My right hon. Friend the Member for Charnwood (Mr. Dorrell), the former Financial Secretary No. 1, made a powerful case about the effect of the measure on the location of headquarters. My right hon. Friend the Member for Fylde (Mr. Jack), the former Financial Secretary No. 2—I do not suggest by that any order of priority, other than of speaking—made it clear that we needed an analysis of the economic impact of the measure. My hon. Friend the Member for Grantham and Stamford (Mr. Davies) made it abundantly plain that we are dealing with an abuse of process, an abuse of Parliament and an abuse of substance.
In the Paymaster General's response to the debate, she made three arguments. Her first was that, although the text of the consultation document, which she proceeded to misquote, made no mention whatever of the proposal

that is hereby being enacted, and hence in no way was there any consultation on that proposal, it was nevertheless—I think I quote almost exactly—quite obvious to anyone engaged in the process that this would be, or might be, the measure that was forthcoming. If she thinks that it is quite obvious, it is odd that the CBI thought that it was unexpected, that the Institute of Directors thought that it was unheralded, that the Chartered Institute of Taxation thought that it was a surprise and that most of British industry is hopping up and down because it claims that it was never told about it. If it was obvious enough for the Paymaster General, she might have let some others into the secret. It would have been helpful.
Secondly, the Paymaster General told the Committee that the yield would be minute, not enormous, and she told us that on the basis of Inland Revenue calculations. She did not see fit to give way to allow me to ask the question which I invite her to answer now. Was it pointed out to the Inland Revenue and to her economic adviser in a meeting with accountants when the issue was raised that the base year upon which the calculation was made was exceptional? She did not answer then and she does not answer now. The fact is that the calculations that she suggested are not substantiated, are probably inaccurate and are not reflected in the views of any of those who have commented on this, whether the CBI, the IOD, the major firms or the various firms of accountants. Not in one of those sources do we find a similarity of view about the amounts to be raised. It would be interesting to know whether the hon. Lady is willing to stake her continued career on the effect of the measure next year, or, if it is to be delayed by nine months, a year later.
Thirdly, the Paymaster General claimed that the measure had been welcomed or heralded by a large number of people in various articles. It would be interesting to know whether it is generally the Treasury's practice to ignore the advice, after a proposal is put forward, of the big six accountancy firms, the CBI, the Chartered Institute of Taxation and the IOD, in favour of three or four academic articles, one of which was undoubtedly submitted for publication before the Budget and hence—although apparently it was quite obvious—before the writer had the slightest idea what the proposal in question would be.
But all those things, as my right hon. and hon. Friends have pointed out, pale into utter insignificance when compared with what the Paymaster General did not say. In the whole of her speech, she never once mentioned whether the measure would substantially deter important companies from locating their headquarters in the UK, and, if so, whether that would have a huge and sustained knock-on effect on our economy.
I can only conclude either that the Paymaster General does not care what happens to the UK economy, which is unlikely, or that she—this must be the more likely case—knows that there is a real problem here, but does not want to admit it or consult on it because she knows that it would entail admitting that the Government have, in this case, as Governments do because they are composed of human beings and we are all fallible, we as much as they—[Interruption.] My hon. Friends may disagree, but I admit on behalf of the Conservative party that we are human. So, too, are the Government. Unfortunately, Ministers and officials, in this case probably an economic adviser and a few Ministers, over against the Inland Revenue, have made a tremendous and signal error.
The easy way to deal with those errors is to withdraw the proposal by letting the clause fall and to return later with one of the options described in a perfectly reputable Inland Revenue consultation document, and discussed the length and breadth of British industry—either the mixer companies or the onshore pooling. We could all then rest easy that the Government will not go down in history as having destroyed a large chunk of our economy. As things stand, that is exactly what is likely to happen and it will be a disgrace if the Government do not withdraw the clause.
Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 254, Noes 123.

Division No. 178]
[10.29 pm


AYES


Adams, Mrs Irene (Paisley N)
Corbyn, Jeremy


Ainger, Nick
Corston, Jean


Ainsworth, Robert (Cov'try NE)
Cox, Tom


Alexander, Douglas
Cranston, Ross



Crausby, David


Armstrong, Rt Hon Ms Hilary
Cryer, Mrs Ann (Keighley)


Atherton, Ms Candy
Cryer, John (Hornchurch)


Austin, John
Cummings, John


Banks, Tony
Cunningham, Rt Hon Dr Jack (Copeland)


Barnes, Harry



Bayley, Hugh
Dalyell, Tam


Beard, Nigel
Darling, Rt Hon Alistair


Benn, Hilary (Leeds C)
Davey, Valerie (Bristol W)


Bennett, Andrew F
Davidson, Ian


Benton, Joe
Davies, Rt Hon Denzil (Llanelli)



Dawson, Hilton


Bermingham, Gerald
Dean, Mrs Janet


Berry, Roger
Denham, John


Best, Harold
Donohoe, Brian H


Blackman, Liz
Doran, Frank


Blears, Ms Hazel
Dowd, Jim


Boateng, Rt Hon Paul
Drew, David


Borrow, David
Eagle, Maria (L'pool Garston)


Bradley, Keith (Withington)
Edwards, Huw


Bradshaw, Ben
Ellman, Mrs Louise


Brinton, Mrs Helen
Ennis, Jeff


Brown, Rt Hon Gordon (Dunfermline E)
Field, Rt Hon Frank



Fisher, Mark


Brown, Rt Hon Nick (Newcastle E)
Flint, Caroline


Brown, Russell (Dumfries)
Flynn, Paul


Browne, Desmond
Foster, Rt Hon Derek


Butler, Mrs Christine
Foster, Michael Jabez (Hastings)


Byers, Rt Hon Stephen
Foulkes, George


Campbell, Mrs Anne (C'bridge)
Fyfe, Maria


Campbell-Savours, Dale
Gardiner, Barry


Cann, Jamie
George, Bruce (Walsall S)


Caplin, Ivor
Gerrard, Neil


Caton, Martin
Gibson, Dr Ian


Cawsey, Ian
Godman, Dr Norman A


Chaytor, David
Godsiff, Roger


Clapham, Michael
Goggins, Paul


Clark, Rt Hon Dr David (S Shields)
Gordon, Mrs Eileen


Clark, Dr Lynda (Edinburgh Pentlands)
Griffiths, Nigel (Edinburgh S)



Grocott, Bruce


Clarke, Charles (Norwich S)
Grogan, John


Clarke, Eric (Midlothian)
Hain, Peter


Clarke, Rt Hon Tom (Coatbridge)
Hall, Mike (Weaver Vale)


Clarke, Tony (Northampton S)
Hanson, David


Clwyd, Ann
Harman, Rt Hon Ms Harriet


Coaker, Vernon
Heal, Mrs Sylvia


Colman, Tony
Healey, John


Connarty, Michael
Henderson, Ivan (Harwich)


Cooper, Yvette
Hepburn, Stephen


Corbett, Robin
Hill, Keith



Hinchliffe, David



Hodge, Ms Margaret



Hoey, Kate




Hood, Jimmy
Perham, Ms Linda


Hoon, Rt Hon Geoffrey
Pickthall, Colin


Hope, Phil
Pike, Peter L


Howells, Dr Kim
Plaskitt, James


Hughes, Kevin (Doncaster N)
Pollard, Kerry


Humble, Mrs Joan
Pond, Chris


Hurst, Alan
Pound, Stephen


Hutton, John
Prentice, Ms Bridget (Lewisham E)


Iddon, Dr Brian
Prentice, Gordon (Pendle)


Jackson, Ms Glenda (Hampstead)
Prescott, Rt Hon John


Johnson, Alan (Hull W & Hessle)
Primarolo, Dawn


Johnson, Miss Melanie (Welwyn Hatfield)
Prosser, Gwyn



Purchase, Ken


Jones, Rt Hon Barry (Alyn)
Quin, Rt Hon Ms Joyce


Jones, Helen (Warrington N)
Radice, Rt Hon Giles


Jones, Ms Jenny (Wolverh'ton SW)
Rammell, Bill


Jones, Dr Lynne (Selly Oak)
Rapson, Syd


Jones, Martyn (Clwyd S)
Raynsford, Nick


Jowell, Rt Hon Ms Tessa
Reed, Andrew (Loughborough)


Keen, Alan (Feltham & Heston)
Reid, Rt Hon Dr John (Hamilton N)


Khabra, Piara S
Roche, Mrs Barbara


Kilfoyle, Peter
Rooker, Rt Hon Jeff



Ross, Ernie (Dundee W)



Rowlands, Ted


Ladyman, Dr Stephen
Roy, Frank


Lawrence, Mrs Jackie
Ruane, Chris


Lepper, David
Ruddock, Joan


Levitt, Tom
Ryan, Ms Joan


Liddell, Rt Hon Mrs Helen
Sarwar, Mohammad


Linton, Martin
Sawford, Phil


Lloyd, Tony (Manchester C)
Sedgemore, Brian


Llwyd, Elfyn
Sheerman, Barry


Love, Andrew
Simpson, Alan (Nottingham S)


McAvoy, Thomas
Skinner, Dennis


McDonagh, Siobhain
Smith, Rt Hon Andrew (Oxford E)


Macdonald, Calum
Smith, Miss Geraldine (Morecambe & Lunesdale)


McDonnell, John


McFall, John
Smith, Jacqui (Redditch)


McGuire, Mrs Anne
Smith, John (Glamorgan)


McIsaac, Shona
Smith, Llew (Blaenau Gwent)


McKenna, Mrs Rosemary
Snape, Peter


Mackinlay, Andrew
Soley, Clive


McNamara, Kevin
Spellar, John


MacShane, Denis
Squire, Ms Rachel


Mactaggart, Fiona
Steinberg, Gerry


McWilliam, John
Stevenson, George


Mahon, Mrs Alice
Stewart, David (Inverness E)


Marsden, Paul (Shrewsbury)
Stewart, Ian (Eccles)


Marshall, Jim (Leicester S)
Stoate, Dr Howard


Marshall-Andrews, Robert
Strang, Rt Hon Dr Gavin


Meacher, Rt Hon Michael
Stuart, Ms Gisela


Michael, Rt Hon Alun
Taylor, Rt Hon Mrs Ann (Dewsbury)


Milburn, Rt Hon Alan
Taylor, David (NW Leics)


Miller, Andrew
Temple-Morris, Peter


Moffatt, Laura
Thomas, Gareth (Clwyd W)


Moonie, Dr Lewis
Thomas, Simon (Ceredigion)


Moran, Ms Margaret
Timms, Stephen


Morgan, Ms Julie (Cardiff N)
Tipping, Paddy


Morley, Elliot
Todd, Mark


Morris, Rt Hon Ms Estelle (B'ham Yardley)
Touhig, Don



Trickett, Jon


Murphy, Denis (Wansbeck)
Turner, Dennis (Wolverh'ton SE)


Murphy, Jim (Eastwood)
Turner, Dr Desmond (Kemptown)


Naysmith, Dr Doug
Turner, Dr George (NW Norfolk)


Norris, Dan
Twigg, Derek (Halton)


O'Brien, Bill (Normanton)
Tynan, Bill


O'Hara, Eddie
Vis, Dr Rudi


Olner, Bill
Ward, Ms Claire


O'Neill, Martin
Welsh, Andrew


Organ, Mrs Diana
Wicks, Malcolm


Osborne, Ms Sandra
Wigley, Rt Hon Dafydd


Palmer, Dr Nick
Williams, Rt Hon Alan (Swansea W)


Pearson, Ian





Williams, Mrs Betty (Conwy)
Wright, Dr Tony (Cannock)


Wilson Brian


Winnick, David


Wood, Mike
Tellers for the Ayes:


Worthington, Tony
Mr. David Clelland and


Wray, James
Mr. Graham Allen.



NOES


Amess, David
Kirkwood, Archy


Arbuthnot, Rt Hon James
Lansley, Andrew


Atkinson, Peter (Hexham)
Leigh, Edward


Ballard, Jackie
Letwin, Oliver


Beith, Rt Hon A J
Lewis, Dr Julian (New Forest E)


Bercow, John
Livsey, Richard


Blunt, Crispin
Lloyd, Rt Hon Sir Peter (Fareham)


Boswell, Tim
Loughton, Tim


Brady, Graham
Lyell, Rt Hon Sir Nicholas


Brand, Dr Peter
McIntosh, Miss Anne


Brazier, Julian
MacKay, Rt Hon Andrew


Brooke, Rt Hon Peter
Maclean, Rt Hon David


Browning, Mrs Angela
Maclennan, Rt Hon Robert


Bruce, Ian (S Dorset)
Madel, Sir David


Bruce, Malcolm (Gordon)
Malins, Humfrey


Burstow, Paul
Maples, John


Butterfill, John
Maude, Rt Hon Francis


Campbell, Rt Hon Menzies (NE Fife)
Mawhinney, Rt Hon Sir Brian



May, Mrs Theresa


Cash, William
Moss, Malcolm


Chapman, Sir Sydney (Chipping Barnet)
Nicholls, Patrick



Norman, Archie


Clappison, James
Ottaway, Richard


Collins, Tim
Page, Richard


Cormack, Sir Patrick
Paice, James


Cran, James
Paterson, Owen


Curry, Rt Hon David
Pickles, Eric


Davey, Edward (Kingston)
Portillo, Rt Hon Michael


Davies, Quentin (Grantham)
Robathan, Andrew


Davis, Rt Hon David (Haltemprice)
Robertson, Laurence


Dorrell, Rt Hon Stephen
Rowe, Andrew (Faversham)


Duncan Smith, Iain
Russell, Bob (Colchester)


Emery, Rt Hon Sir Peter
St Aubyn, Nick


Faber, David
Shephard, Rt Hon Mrs Gillian


Fabricant, Michael
Simpson, Keith (Mid-Norfolk)


Flight, Howard
Smith, Sir Robert (W Ab'd'ns)


Forth, Rt Hon Eric
Spicer, Sir Michael


Fowler, Rt Hon Sir Norman
Stanley, Rt Hon Sir John


Fox, Dr Liam
Steen, Anthony


Gale, Roger
Swayne, Desmond


Garnier, Edward
Syms, Robert


Gibb, Nick
Tapsell, Sir Peter


Gill, Christopher
Taylor, Ian (Esher & Walton)


Gray, James
Taylor, John M (Solihull)


Green, Damian
Taylor, Matthew (Truro)


Greenway, John
Taylor, Sir Teddy



Tredinnick, David


Grieve, Dominic
Trend, Michael


Hamilton, Rt Hon Sir Archie
Tyler, Paul


Hammond, Philip
Tyrie, Andrew


Harvey, Nick
Waterson, Nigel


Hawkins, Nick
Webb, Steve


Heald, Oliver
Whitney, Sir Raymond


Heath, David (Somerton & Frome)
Whittingdale, John


Heathcoat-Amory, Rt Hon David
Widdecombe, Rt Hon Miss Ann


Hogg, Rt Hon Douglas
Willetts, David


Horam, John
Wilshire, David


Howard, Rt Hon Michael
Winterton, Mrs Ann (Congleton)


Howarth, Gerald (Aldershot)
Winterton, Nicholas (Macclesfield)


Jack, Rt Hon Michael
Yeo, Tim


Jackson, Robert (Wantage)
Young, Rt Hon Sir George


Jenkin, Bernard


Key, Robert
Tellers for the Noes:


King, Rt Hon Tom (Bridgwater)
Mrs. Eleanor Laing and


Kirkbride, Miss Julie
Mr. Peter Luff.

Question accordingly agreed to.

Clause 102 ordered to stand part of the Bill.

Clause 113

RATES: CONVEYANCE OR TRANSFER ON SALE

Question proposed, That the clause stand part of the Bill.

Mr. Flight: Clause 113 introduces—if I may put it thus—a much more naked and transparent stealth tax. It will raise stamp duty by a further 0.5 per cent.—for the third year running—making tax on property sales in this country one of the highest in the developed world. The clause is in part IV, which deals with stamp duty in general. Clause 116 empowers the Treasury to change the rules merely by statutory instrument, and we shall object to that strongly as well. Other proposed changes exclude property transfers to social institutions from stamp duty, and tighten coverage in the case of companies and leases.
The Government say that they expect to derive a yield of some £290 million over the tax year to next April. In due time, we shall ask what the yield is: given the cyclical increase in property transactions, we suspect that it will be substantially above the predicted figure.
The proposed tax is mainly a stealth tax on business. We particularly object to the contradiction between the Prime Minister's entirely correct support for the flexible Anglo-Saxon system—the Anglo-Saxon economies have been successful here and in the United States—and the proposal for a tax that will damage corporate restructuring, prevent improvements in productivity and discourage investment. Members may recollect the Chancellor extolling the McKinsey report on how to improve productivity in this country and the damage done to productivity improvements by our system of taxing property and by some of our planning laws.
10.45 pm
How much will stamp duty cost in the Rover restructuring? Whatever the cost is, another 0.5 per cent. will be added as a result of the Bill. It is particularly damaging for small businesses because property is their main asset. It is the asset against which they go to banks to borrow money. The main effect of the rise in stamp duty—up some 400 per cent. since the Government came to power—for businesses is to increase the volatility of prices, particularly in down cycles. For that reason, the banking sector will be less willing to lend to small business.
I have referred to clause 116. The Government have implicitly already accepted that they have hiked the tax to the limit because they are looking to give themselves discretionary measures to try to attack the mitigation that they expect, particularly from businesses seeking to save on such a high level of tax when they want to restructure.
The tax obviously bears on individuals, too. It is both unfair and economically damaging. It hits the more enterprising in society. How often has the House heard the Chancellor say that his policies are driven by fairness and encourage entrepreneurship? Here we have something that points in the other direction.
Some Labour Members have been gloating that the tax will soak the rich, as it soaked rich people such as the Prime Minister when he sold his house in Islington, but, in reality, it is a tax on middle England. Since the last data were produced, property prices in the southern half


of England have risen by between 20 and 50 per cent. Some 25 per cent. of the property market in the south-east is represented by houses costing about £250,000—it is the average price of three and four-bedroom family houses—which will bear the new rate of stamp duty of 3 per cent.
Who moves? Who wants to move? It is people who have to move because of their jobs. It is people who produce children and need larger houses. This is a tax on job mobility and yet another stealth tax on families.
The measure causes more subtle damage. There are problems with potential over-building in the southern half of the country. Senior citizens are already often reluctant to move from the houses that they have lived in to smaller accommodation. That will discourage yet more such senior citizens from vacating larger family houses.
It is the increase in volatility that we are particularly concerned about. When the downturn comes and when the Chancellor realises that he has not abolished the economic cycle, the greater volatility will increase opportunities for negative equity in two ways. First, when there is a much higher tax on buyers and when the market is bad, buyers retreat. Secondly, many families will have used up their capital in paying significant amounts of stamp duty when buying their properties.
The excuse that the Government will give is that the measures are designed to contain property overheating. When the deputy Governor of the Bank of England gave evidence to the Select Committee on Education and Employment recently, he reported that such fiscal measures were not an effective tool in determining prices, particularly domestic property prices, during up cycles. As I have said, such measures worsen the volatility in down cycles, but do not constrain upward movement in up cycles.
In summary, this is another extremely cynical stealth tax that was designed purely to raise revenue. Its economic effects will be bad. They will be particularly damaging in the very areas that the Chancellor claims that he wants to improve.

Mr. Matthew Taylor: I shall not detain the House long, but I wish to raise a significant issue in respect of stamp duty, which this and previous Governments have avoided tackling—one that becomes more serious as the rates increase.
If we are to have such a system, it makes sense that the Government should attempt to close any loopholes. Indeed, it is surprising that they have not gone further in tackling the use of companies as a tax shelter in respect of property transactions. Presumably, that is why they have left open the opportunity to make further changes by order. Although I do not consider that to be the appropriate mechanism, I hope that the Government will attempt to create a system whereby people pay according to the value of the transaction and not according to how much they can afford to pay specialists to help them avoid paying tax as that tends to mean that big companies avoid paying tax and small companies and individuals end up paying it.
The Government have not addressed the fact that stamp duty is an unusual tax in that different banded levels increase with the value of the transaction, yet the increases apply to the entire transaction. That leads to a simple form of avoidance in that people try to keep the price just below the relevant threshold. As the duty increases on

transactions over £250,000, a difference of just £1 in the price of a property makes a difference of £5,000 on the tax that falls on the individual or company. As a result, people try to avoid tax, not always through legitimate means, such as by selling fixtures and fittings at an inflated price while reducing the notional price of the property.
Research that I have undertaken through the Land Registry shows that as stamp duty has increased, there has been a decrease in the number of properties sold at just over £250,000 and an increase in the number sold at just under £250,000. The difference widens as the tax incentive increases. The Secretary of State for Northern Ireland benefited from that by coming in just under the threshold. It cannot be right to have prices bunching just under the break levels so that purchasers avoid tax. Whatever any particular individual may have done, I have no doubt that some people are deliberately avoiding tax. That is not good for the Treasury or the tax system and it makes no proper sense.
Other taxes operate so that the increase applies only to the part of the transaction that is above the break point. It would be possible to make that reform on a revenue-neutral basis, if that were what the Government wanted to do, and it would have exactly the same effect in terms of dampening down the property boom. The tax burden would fall more fairly. Such a reform would remove the incentive to try to avoid tax. Surely, making such a reform would also be infinitely simpler than trying to use Inland Revenue checks to determine whether the fixtures and fittings have been overvalued and the property undervalued. Not only is it pretty difficult to resolve such arguments, but it could cost an awful lot to get a result.
I have tried, consulting the Library and tax experts, to research why we have our peculiar tax banding structure, but answer came there none. The answer was simply, "That's historically how it's been done." I do not think that the current Government feel particularly tied to doing things in a certain way simply because they have always been done that way. I should therefore like to hear from the Minister why that reform has not been pursued, whether it might be pursued, and whether it might not be a more sensible approach than that being pursued by the Government.
Additionally, if the Government are proposing the increases to dampen the residential property boom, why have they not considered creating a divide between commercial and residential property? Such a divide exists in many other countries and has not caused major tax avoidance problems. I think that that, too, would he a sensible measure.
I hope that the Government will consider making those simple reforms, which would help to create a more progressive tax structure and remove the incentive to cheat that the current system undoubtedly presents.

The Economic Secretary to the Treasury (Miss Melanie Johnson): In his opening remarks, the hon. Member for Arundel and South Downs (Mr. Flight) most amusingly alleged that the measure was some type


of "transparent stealth tax"—which is a new Tory contradiction in terms, to add to all the many other contradictions that they have recently offered us.

Mr. Flight: Will the Minister give way?

Miss Johnson: I have barely uttered a full sentence, but I shall give way to the hon. Gentleman.

Mr. Flight: The word "stealth" has two applications in this context. It applies, first, because the increase is a significant but unexpected tax on business. It applies, secondly, because people do not necessarily think about tax when they have to change houses after changing jobs or relocating, or when their family has grown. The tax therefore sneaks up on them.

Miss Johnson: I think that the hon. Gentleman has just accepted that his point was not very meaningful.
The hon. Gentleman dealt with the measure's effect, in the residential sector, on families. I should like to explain how the Government's actions are helping families. In our Budgets since the general election, we have done a huge amount to help families. We have reduced tax on the average family, so that for a single-earner family on average earnings with two children, tax is at the lowest rate since 1972. [Interruption.] The right hon. Member for Wells (Mr. Heathcoat-Amory) can say that he does not believe it, but it is a fact. In these matters, there is nothing as unarguable as a fact.
We also have incredibly low mortgage rates—which are particularly low in comparison with the mortgage rates that applied at their peak in the 1990s. Therefore, on average, people will be paying £300 less per month because of the Labour Government's economic policies and platform, the stability that we have created, and the low inflation and low interest rates that we have managed to generate. Householders are much better off.
We should also consider how many people will pay stamp duty on residential transactions. The fact is that more than one third of transactions incur no stamp duty at all—they never have incurred stamp duty. Moreover, 95 per cent. of sales will be completely unaffected by the Budget's provisions. Those are the facts that the House should consider. The hon. Gentleman gave us scarcely any facts in favour of his hypothesis. There is no evidence that the measures on stamp duty in this or earlier Budgets have had any effect on house prices or the number of transactions carried out in the residential property market.
11 pm
The same is true of commercial sales. We have a healthy commercial sector, which has enjoyed good growth. A large number of transactions take place and there is no evidence of any problem. In last year's Budget debate, Conservative Members put forward hypotheses that there would be damage as a result of last year's measures. Well, we have this year's figures, and I notice that the hon. Gentleman has not referred to the implications of last year's arguments. It is clear that the problems that Conservative Members referred to then have not materialised, and that the Government have been proved right. Stamp duty presents a fair and progressive system of taxation, which is why we have made these proposals.
The hon. Gentleman referred to loan collateral and the possible harmful effect on business. There is no evidence that a stamp duty increase of 0.5 per cent. reduces property values significantly, if at all. In fact, commercial property is not usually of primary importance as collateral, so on neither count is there evidence of a problem. It was suggested that the measure might have been taken to help stabilise the housing market. That is not its main purpose; its main purpose is to put in place a fair and progressive structure for stamp duty. Our macro-economic framework is the main measure to stabilise the housing market. That is working to the benefit of the economy, businesses and families—people right across the country are benefiting from our management of the economy.
The hon. Member for Truro and St. Austell talked about the loopholes that are being closed. There are a number of such loopholes, some of which we have considered for some time. They include a revised definition of "group" for the purposes of stamp duty relief for transfers of property between associated companies. I hope that the hon. Gentleman will give us his full support on our measures to close those loopholes.
I was distressed to hear that the hon. Member for Arundel and South Downs will not be supporting clause 116. That measure will enable us, when we discover avoidance techniques, to close loopholes in the middle of a year between Finance Bills. People will be able to discuss the way in which that is being done, but the measure will stop off revenue outflows that should be going to the Exchequer because people are finding loopholes in the system.
I cannot comment on the Rover restructuring. There are many issues that are still, unfortunately, unresolved, and although the hon. Gentleman invited me to comment, it would not be appropriate for me to do so.
The hon. Member for Truro and St. Austell remarked on the way in which we might change to what is called a slice basis for stamp duty. The full-year cost would probably approach £1.5 billion, or more than a third of the current yield from the duty. Higher rates of duty would then be needed to maintain the yield. It would be interesting to hear what measure the hon. Gentleman would propose to stop up the gap—the money that would be missing from the Exchequer—as a result of that suggestion.

Mr. Matthew Taylor: I was talking about a revenue-neutral basis. The hon. Lady has suggested how that can be done. Is she aware that under the present system, before the Chancellor started to raise the differentials for more valuable property there was virtually no difference in the number of transactions just above and just below the £250,000 band. After the first increase, 139 properties were sold just under the £250,000 band for every 100 above it. Now, 151 are sold at just under £250,000 for every 100 above it. There is clear evidence of avoidance and of loss of revenue to the Exchequer as a result. Therefore, there is clear evidence that we have created a system that favours the cheat over the honest person.

Miss Johnson: I cannot agree. There are different ways to structure stamp duty, but other methods, in particular the slice basis, cause problems of their own. That method would cause a significant loss to the Exchequer.
The sort of problems that the hon. Gentleman describes are not apparent. We are still collecting the revenue that we have always expected to collect from stamp duty. Indeed, last year, we met the expected target for the collection of stamp duty revenues. The case that he put forward is not borne out by the facts.

Mr. Campbell-Savours: Is it not true that the phenomena that the hon. Member for Truro and St. Austell (Mr. Taylor) mentioned show that the measure is probably having a deflationary effect on house prices?

Miss Johnson: That could indeed be so. There is a danger in changing the basis of something that has always worked well. Stamp duty was introduced in 1694. [Interruption.] I am conscious of the fact that many hon. Member would like to leave the Chamber to go home to their beds.
Stamp duty is an extremely efficient tax. The measures that we are introducing are giving a fairer and more progressive structure to the tax. There is no evidence that we need to change the basis for the duty on commercial or residential property, or indeed shares. It brings revenue into the Exchequer and we are, in fact, in a beneficial position. I urge hon. Members to support the proposal. It is working well and will continue to do so.

Mr. Flight: I shall be brief. First, do the Government intend to continue with their policy of increasing stamp duty by 0.5 per cent. per annum, or do they believe that the level that the duty has reached represents some form of ceiling?
Secondly, the Minister seemed to argue that extra charges on transactions have no economic impact. For the past three years, for a variety of reasons, property prices have been rising continuously. Bank of England studies have found that increased transaction costs have an impact when the market goes down—the increase in volatility and the fall in prices tend to be exaggerated by rising transaction costs. Then, families really suffer if it takes them into negative equity. Independent data show that families are already paying about £670 more in tax per annum, so they are not better off in tax terms. Furthermore, they have lost their mortgage interest relief at source.
I pointed out the objections to clause 116; they were echoed by the hon. Member for Truro and St. Austell (Mr. Taylor). In essence, they are that the clause lacks clarity—if there is a problem to be dealt with, it does not help the marketplace if matters are not clear and certain. It would be better if there were specific clauses to address any problems that the Government believe are outstanding.
I rebut the assertion that 95 per cent. of transactions will not be affected. As I pointed out, those data were produced before the rise in house prices that has taken place over the past year or so; in the south-east, that has certainly been in the order of 20 per cent. The Economic Secretary to the Treasury herself commented—presumably she was including commercial property—that only a third of transactions paid no form of stamp duty.
I repeat that this tax is predominantly levied on business. The Minister did not reply to my points on that issue. Business pays the most stamp duty. It is a tax on businesses that relocate and set up new operations in different parts of the country. It is a tax that will apply in situations such as that of Rover, where major changes must be made in order to survive.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 242, Noes 50.

Division No. 179]
[11.12 pm


AYES


Adams, Mrs Irene (Paisley N)
Dawson, Hilton


Ainger, Nick
Dean, Mrs Janet


Ainsworth, Robert (Cov'try NE)
Denham, John


Alexander, Douglas
Donohoe, Brian H


Allen, Graham
Doran, Frank


Anderson, Donald (Swansea E)
Drew, David


Armstrong, Rt Hon Ms Hilary
Eagle, Maria (L 'pool Garston)


Atherton, Ms Candy
Edwards, Huw


Austin, John
Ellman, Mrs Louise


Banks, Tony
Field, Rt Hon Frank


Barnes, Harry
Fisher, Mark


Bayley, Hugh
Flint, Caroline


Beard, Nigel
Flynn, Paul


Benn, Hilary (Leeds C)
Foster, Rt Hon Derek


Bennett, Andrew F
Foster, Michael Jabez (Hastings)


Benton, Joe
Foulkes, George


Berry, Roger
Fyfe, Maria


Best, Harold
Gardiner, Barry


Blackman, Liz
George, Bruce (Walsall S)


Blears, Ms Hazel
Gerrard, Neil


Boateng, Rt Hon Paul
Gibson, Dr Ian


Borrow, David
Godman, Dr Norman A


Bradley, Keith (Withington)
Godsiff, Roger


Brinton, Mrs Helen
Goggins, Paul


Brown, Rt Hon Nick (Newcastle E)
Gordon, Mrs Eileen


Brown, Russell (Dumfries)
Griffiths, Nigel (Edinburgh S)


Browne, Desmond
Grocott, Bruce


Butler, Mrs Christine
Grogan, John


Campbell-Savours, Dale
Hain, Peter


Caplin, Ivor
Hall, Mike (Weaver Vale)


Caton, Martin
Hanson, David


Cawsey, Ian
Harman, Rt Hon Ms Harriet


Chaytor, David
Heal, Mrs Sylvia


Clapham, Michael
Healey, John


Clark, Rt Hon Dr David (S Shields)
Henderson, Ivan (Harwich)


Clark, Dr Lynda (Edinburgh Pentlands)
Hepburn, Stephen



Hill, Keith


Clarke, Charles (Norwich S)
Hinchliffe, David


Clarke, Eric (Midlothian)
Hodge, Ms Margaret


Clarke, Rt Hon Tom (Coatbridge)
Hoey, Kate


Clarke, Tony (Northampton S)
Hood, Jimmy


Clwyd, Ann
Hoon, Rt Hon Geoffrey


Coaker, Vernon
Hope, Phil


Colman, Tony
Howells, Dr Kim


Connarty, Michael
Hughes, Kevin (Doncaster N)


Corbett, Robin
Humble, Mrs Joan


Corbyn, Jeremy
Hurst, Alan


Corston, Jean
Hutton, John


Cox, Tom
Iddon, Dr Brian


Cranston, Ross
Jackson, Ms Glenda (Hampstead)


Crausby, David
Johnson, Alan (Hull W & Hessle)


Cryer, Mrs Ann (Keighley)
Johnson, Miss Melanie (Welwyn Hatfield)


Cryer, John (Hornchurch)


Cummings, John
Jones, Rt Hon Barry (Alyn)


Cunningham, Rt Hon Dr Jack (Copeland)
Jones, Helen (Warrington N)



Jones, Ms Jenny (Wolverh'ton SW)


Dalyell, Tam


Darling, Rt Hon Alistair
Jones, Dr Lynne (Selly Oak)


Davey, Valerie (Bristol W)
Jones, Martyn (Clwyd S)


Davidson, Ian
Jowell, Rt Hon Ms Tessa


Davies, Rt Hon Denzil (Llanelli)
Keen, Alan (Feltham & Heston)





Khabra, Piara S
Pickthall, Colin


Kilfoyle, Peter
Pike, Peter L


Ladyman, Dr Stephen
Plaskitt, James


Lawrence, Mrs Jackie
Pollard, Kerry


Lepper, David
Pond, Chris


Levitt, Tom
Pound, Stephen


Liddell, Rt Hon Mrs Helen
Prentice, Ms Bridget (Lewisham E)


Linton, Martin
Prentice, Gordon (Pendle)


Lloyd, Tony (Manchester C)
Prescott, Rt Hon John


Llwyd, Elfyn
Primarolo, Dawn


Love, Andrew
Prosser, Gwyn


McAvoy, Thomas
Purchase, Ken


McDonagh, Siobhain
Quin, Rt Hon Ms Joyce


Macdonald, Calum
Rammell, Bill


McDonnell, John
Rapson, Syd


McFall, John
Raynsford, Nick


McGuire, Mrs Anne
Reed, Andrew (Loughborough)


McIsaac, Shona
Reid, Rt Hon Dr John (Hamilton N)


McKenna, Mrs Rosemary
Robinson, Geoffrey (Cov'try NW)


Mackinlay, Andrew
Roche, Mrs Barbara


McNamara, Kevin
Rooker, Rt Hon Jeff


MacShane, Denis
Ross, Ernie (Dundee W)


Mactaggart, Fiona
Rowlands, Ted


McWilliam, John
Roy, Frank


Mahon, Mrs Alice
Ruane, Chris


Marsden, Paul (Shrewsbury)
Ruddock, Joan


Marshall, Jim (Leicester S)
Ryan, Ms Joan


Meacher, Rt Hon Michael
Sarwar, Mohammad


Meale, Alan
Sawford, Phil


Michael, Rt Hon Alun
Sedgemore, Brian


Milburn, Rt Hon Alan
Sheerman, Barry


Miller, Andrew
Skinner, Dennis


Moffatt, Laura
Smith, Rt Hon Andrew (Oxford E)


Moonie, Dr Lewis
Smith, Miss Geraldine (Morecambe & Lunesdale)


Moran, Ms Margaret


Morgan, Ms Julie (Cardiff N)
Smith, John (Glamorgan)


Morley, Elliot
Smith, Llew (Blaenau Gwent)


Morris, Rt Hon Ms Estelle (B'ham Yardley)
Snape, Peter



Soley, Clive


Murphy, Denis (Wansbeck)
Spellar, John


Murphy, Jim (Eastwood)
Squire, Ms Rachel


Naysmith, Dr Doug
Steinberg, Gerry


Norris, Dan
Stevenson, George


O'Brien, Bill (Normanton)
Stewart, David (Inverness E)


O'Hara, Eddie
Stewart, Ian (Eccles)


Olner, Bill
Stoate, Dr Howard


O'Neill, Martin
Strang, Rt Hon Dr Gavin


Organ, Mrs Diana
Stuart, Ms Gisela


Osborne, Ms Sandra
Taylor, Rt Hon Mrs Ann (Dewsbury)


Palmer, Dr Nick


Pearson, Ian
Taylor, David (NW Leics)




Temple-Morris, Peter
Wigley, Rt Hon Dafydd


Thomas, Gareth (Clwyd W)
Williams, Rt Hon Alan (Swansea W)


Thomas, Simon (Ceredigion)


Timms, Stephen
Williams, Alan W (E Carmarthen)


Tipping, Paddy
Williams, Mrs Betty (Conwy)


Todd, Mark
Wilson, Brian


Touhig, Don
Winnick, David


Trickett, Jon
Wood, Mike


Turner, Dennis (Wolverh'ton SE)
Worthington, Tony


Turner, Dr Desmond (Kemptown)
Wray, James


Turner, Dr George (NW Norfolk)
Wright, Dr Tony (Cannock)


Twigg, Derek (Halton)


Tynan, Bill
Tellers for the Ayes:


Vis, Dr Rudi
Mr. David Clelland and


Ward, Ms Claire
Mr. Jim Dowd.



NOES


Arbuthnot, Rt Hon James
Jack, Rt Hon Michael


Atkinson, Peter (Hexham)
Kirkwood, Archy


Ballard, Jackie
Leigh, Edward


Boswell, Tim
Letwin, Oliver


Brady, Graham
Lewis, Dr Julian (New Forest E)


Brazier, Julian
Lyell, Rt Hon Sir Nicholas


Bruce, Malcolm (Gordon)
McIntosh, Miss Anne


Burstow, Paul
Mawhinney, Rt Hon Sir Brian


Campbell, Rt Hon Menzies (NE Fife)
Paterson, Owen



Portillo, Rt Hon Michael


Cash, William
Robertson, Laurence


Collins, Tim
Russell, Bob (Colchester)


Cran, James
Simpson, Keith (Mid-Norfolk)


Davey, Edward (Kingston)
Smith, Sir Robert (W Ab'd'ns)


Davies, Quentin (Grantham)
Stanley, Rt Hon Sir John



Steen, Anthony


Dorrell, Rt Hon Stephen
Swayne, Desmond


Emery, Rt Hon Sir Peter
Syms, Robert


Flight, Howard
Taylor, Matthew (Truro)


Garnier, Edward
Tredinnick, David


Gill, Christopher
Tyler, Paul


Gray, James
Webb, Steve


Greenway, John
Whittingdale, John


Harvey, Nick
Yeo, Tim


Heath, David (Somerton & Frome)


Heathcoat-Amory, Rt Hon David
Tellers for the Noes:


Horam, John
Mrs. Eleanor Laing and


Howarth, Gerald (Aldershot)
Mr. Peter Luff.

Question accordingly agreed to.

Clause 113 ordered to stand part of the Bill.

Bill (Clauses 1, 12, 30, 31, 59, 102 and 113) reported, without amendment; to lie upon the Table.

Orders of the Day — Land Drainage

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Allen.]

Mr. David Heath: I am grateful for the opportunity to raise a matter of great importance to my constituents—land drainage in the Somerset levels. I thank the Minister for seeing my hon. Friend the Member for Taunton (Jackie Ballard), the right hon. Member for Bridgwater (Mr. King) and myself yesterday and for his helpful comments on that occasion.
As the Minister knows, the Somerset levels are a valuable area for many reasons, including not only their scenery and wildlife but the particular way of life there. The one thing that cannot be said about the levels, however, is that they are dry; indeed, they are extremely wet. I do not intend to blame the Government for the fact that it rains in Somerset, because it has done so for a very long time. Nevertheless, flooding is an ever present threat in the area, and in recent years it has been a reality for too many people, with extremely serious consequences for their livelihood and living arrangements.
There are several different categories of interest that coincide on the levels. There are those of the people who live there and those of the communities, and the two sets of interests are not identical because there are individual concerns as well as those of villages and wider areas. There are the problems of agriculture, which is not defined by a single category. As well as small dairy farmers, we have people who are trying to use the land for arable purposes. We also have withy growing and practices that are unique to our area of Somerset. Some of the land is marginal and some is taken up by smallholdings that are difficult to maintain as viable. Some of the land is of high quality, and the concerns do not apply.
The other important factor, which is never to be forgotten, is the great environmental value of the area, which is recognised nationally and internationally as a wetland of great importance.
Each of those interests has different expectations. Individual residents' primary expectation is to be able to enjoy their homes without the water bursting in and ruining it. Communities expect that their businesses will be able to carry them through the winter months, and that they will not have to be cut off because their only road is under water and remains so for long periods. Essentially, they want to feel that the outside world is interested in the continuation of their way of life.
Agricultural interests present a more difficult equation. They have learned to live in balance with the environment; many schemes are designed to support that balance and maintain the equilibrium. Having said that, and although farmers in lowland areas realise that they will occasionally experience winter flooding, they do not expect substantial summer flooding. They do not expect water to be allowed on to their land, to remain there until deoxygenation occurs and they lose the grass hay or crops that they planted; nor do they expect to have to move cattle into buildings during the summer because no pasture is available for long periods.
On the environment front, the expectation is that the water table will be maintained at a reasonably high level. Equally, however, it makes no sense in environmental

terms for large areas of land to be covered in water for long periods, because that destroys the very environment that we want to protect and is not the traditional way to maintain the natural habitat.
The experience is, in some ways, contrary to expectations. I remember the flooding that occurred in my constituency in 1997—the Minister might recall our correspondence at that time. West Moor and South Moor were flooded, quite unexpectedly, when a substantial inundation occurred in August. For various reasons, the Environment Agency chose to leave the water on farmland for a long time, and the result was serious problems for the farmers affected. However, in recent years, flooding in winter months has been more severe than many people expected. Last winter, it was mostly moors in the Taunton and Bridgwater constituencies, not my constituency, that were the worst affected. Nevertheless, communities were cut off, property was damaged and many people experienced considerable difficulty.
The reason why that has happened in successive years is a matter of conjecture. Some say that it is a result of global warming. Yesterday, the Minister said that the result of that should actually be drought in Somerset, but he would not survive long if he came down to the levels and told the people there that they are experiencing drought. However, it is possible that the flooding is a product of climate change.
The problems might also be an effect of maintenance procedures and the flood defence regime that is currently being worked on. That gives rise to particular concern not only because we are experiencing difficulties in lowland areas—to a certain extent, we expect that, although criticism has been voiced about whether the Parrett is providing the required drainage and the rhines are being cleared out regularly—but because there are problems on more elevated land. That is not marginal land or lowland, but prime dairy pasture that has never flooded—land that is not flood plain.
Recently, I went to the Cary valley to inspect the state of the River Cary near Somerton and Castle Cary. In that area, land that historically has not normally flooded has being lying under water. Those who farm the land and know it best are suggesting that something has changed. They suspect that the problem is due to lack of maintenance and clearing, but we cannot be sure that that is so. It may be a contributory factor among many.
Does the Minister accept that there is a fragility to the consensus that many of us have tried to build over the years in that area of the county? That consensus was built on a very difficult genesis. When we first started looking at the need to protect the habitat of the Somerset levels, there was, as the Minister knows, great dissension between the agricultural community and the environmentalists. There was a feeling that neither side understood what the other was trying to do. Eventually, those forces came together and a modus vivendi was accepted. My worry is that that will break down.
I hear the same suspicions expressed today by the conservation and environmental bodies that I heard 10 or 15 years ago—that there is somehow a continual effort to raise the water table and that that ignores the interests of local people. That is of course against the economic backdrop of the crisis in agriculture and the effect that even a small reverse can have on a farm that is only


marginally viable. People are rightly worried about their livelihoods and the effect that such a change will have on them.
Are the flood defence structures still the most appropriate? That was addressed comprehensively by the Agriculture Committee report on the issue, which I commend. Having re-read the report, I find it complete and helpful. Some of its conclusions are far reaching. Is the tiered structure—regional and local flood defence committees and internal drainage boards—providing the confidence that local communities might expect? Are all the people who need to be involved—the players, the partners—sitting around the same tables? Do we have a co-ordinated approach? Are the financial arrangements sufficient to the task?
In Somerset, the precept for flood defences has steadily risen. It is now up to £5.978 million. Over the past two years, it has increased by 11.5 per cent. and 8.2 per cent. respectively. It is the highest per person for any area of England and Wales. Somerset is not a particularly affluent county—it is not the poorest either—yet it is paying that very high share for the defence of land that might be considered a national and international resource. That cost is largely met by local council tax payers.
The other major factor is the diversion of precepted funds to coastal defence. I do not for one moment decry the need for coastal defence but, considering that the Minehead sea defence cost £12.5 million, such defences take a very large chunk out of the precepted amount, diverting funds from internal land drainage, which prevents flooding on the levels, to the task of keeping the sea out. We need both, and it is hard to understand how the cake can be so divided.
I want the Minister to consider whether there is a need to develop not just a response to individual flooding problems but a properly managed strategy for the Somerset levels and, indeed, beyond to the rivers that feed them from the higher ground surrounding the basin. I say that because I do not believe that it is simply a matter of resources or of providing more and more money for engineering work. I do not think that that will have the desired effect.
The desired effect will be achieved by ensuring that maintenance is carried out and that the dredging of channels, rhines and the major rivers, especially the River Parrett, is done effectively. New ways must be found to ensure that water is retained in places where it is environmentally helpful and, so far as possible, does not damage local communities and agricultural interests.
We need to find new ways to diversify agriculture in the areas where flooding cannot be avoided in the long term. New ways to prosperity must be found for the people who farm that land, who have known no other way of life, and who have a reasonable expectation that they can still derive some sort of livelihood from the land. We need to consider both the social and the economic costs of continued flooding. That is not sufficiently addressed in the present funding formula.
If a village is cut off for three weeks, which is not an unreasonable suggestion—I remember that at one time Muchelney was cut off from the outside world for three to four weeks—that has an enormous social cost for the

people living there, who are trapped in their village and find it difficult to get out. That is not recognised in the way in which resources are applied at present.
If we could move towards a more co-ordinated and more forward-looking strategy for the levels area and the Parrett basin, we would be making a significant advance. Does the Minister believe that the Government could and would support such a move? Would they encourage local interests to do so? Will the Minister work with colleagues to make sure that the funding is available to make it happen if solutions can be found, no matter how incomplete they may be?
A solution will not come directly out of the precepted amount or from a central Government grant specifically for flood defence. It must be attracted from a variety of sources dotted around various Departments. If the Minister undertakes to examine solutions to the problems of the Somerset levels, I know that local people are prepared to sit around a table and work together to try to find solutions that will be satisfactory for them. The aim must be not to destroy the environment of that precious area, and not to destroy the legitimate social and economic expectations of the people and communities there and of the agricultural areas surrounding the levels and on them.

The Parliamentary Secretary to the Ministry of Agriculture, Fisheries and Food (Mr. Elliot Morley): I congratulate the hon. Member for Somerton and Frome (Mr. Heath) on obtaining the Adjournment debate, and on the thoughtful and sensible way in which he has made his case and analysed the situation relating to the Somerset levels, which he clearly knows well.
There is no doubt that concerns exist about the funding of flood defences on the Somerset levels and moors. It is not just a matter of resources, as the hon. Gentleman rightly said. The right balance must be struck between the various interests in the area, meeting the needs of the agricultural community and taking into account the internationally recognised conservation value of the Somerset levels, which have been designated as a special protection area and an environmentally sensitive area. It must be acknowledged that farmers depend on the area for their living and that the communities living there can be severely affected at times of flood, as the hon. Gentleman made clear.
The Somerset levels are a natural flood plain, and flooding is part of the natural cycle of events. As the hon. Gentleman rightly said, many people who live and work in the area are used to that natural cycle, and farming patterns have traditionally been based on the need for sustainability, particularly in relation to summer grazing and pastures.
Over the years, there have been changes—for example, arable crops have been introduced—and that has meant a high level of pumping, which has required much investment. We have also had some exceptionally wet winters, so the Somerset levels have been subject to more flooding than people have hitherto been used to. That may well be the result of climate change due to global warming. We certainly seem to be entering a period of wetter winters and drier summers, which has implications for areas such as the Somerset levels, water level management and the Government's allocation of resources for investment programmes. However,


the problems of the Somerset levels are a local matter. Local people must come together to assess the flood defence needs of the area and to determine their priorities.
The Ministry of Agriculture, Fisheries and Food has promoted the production of water level management plans, particularly in environmentally important areas, as a means by which the different needs, including farming and conservation, can be identified, balanced and integrated. Such plans are in place throughout the Somerset levels and moors.
MAFF also recognises that, because of the particular restrictions under which farmers may have to work in environmentally sensitive areas, there is a case for agri-environmental payments. In that regard, farmers in the Somerset levels receive £2.7 million per annum. That is also reflected in the production and agreement of water level management plans.
With regard to community involvement and proposals to deal with the particular problems of the Somerset levels, I support the drawing up of catchment plans. In the Somerset levels, that involves the River Parrett catchment area. There are local proposals to bring together local bodies, such as the Environment Agency, regional flood defence committees, drainage boards, councils and so on, to develop a catchment plan, which may well have implications for determining what needs to be done and arriving at a strategy bearing in mind the available resources. Once the local agricultural and environmental priorities have been determined, local people must consider the various ways in which they can be supported, whether through traditional funding, through precepts raised locally by the regional flood defence committees and capital grants from MAFF, or through the new regional development programme, recognising the unique nature of the Somerset levels and their importance to local communities and nationally.
I am more than willing to consider those issues once the strategy has been drawn up, but I emphasise that such a strategy should be drawn up by local bodies through local representation and the local structures which are in place.
The Government have increased funding for flood and coastal defence by £23 million to a total of £230 million for the three years from the financial year 1999–2000. We will have to take account of the implications of rising sea levels and global warming in our future budgets and the money that we allocate.
I understand that there are proposals for the implementation of major schemes on the lower River Tone at Stanmoor, Baltmoor and Hook bridge in the next three years. They may tackle some of local residents' anxieties about flooding.
The hon. Gentleman asked about funding for the area. It is a tribute to Somerset that the regional flood defence committee has taken its precept duties seriously. In contrast to other parts of the country, especially in the south-west, Somerset has not reined in the resources that have been made available to local councils through the standard spending assessment for flood defence, or refused to pass them on to the regional flood defence committee.
The Government have made more resources available. There was an increase in the standard spending assessment of 6 per cent. in 1997–98, 5.1 per cent. in 1999 and 6.3 per cent. in 1999–2000. The overall grant earnings ceilings—grant rates that are set for Somerset and constitute approved capital expenditure—have been exceeded. The original agreement in 1997–98 was for £3.2 million. Actual expenditure was £4.8 million. The agreement in 1998–99 was for £2.7 million and actual expenditure was £4.5 million. The agreement for 1999–2000 was for £2.6 million and the current estimate of expenditure is £3.7 million. I accept that, as the hon. Gentleman said, expensive coastal defence works, especially in Minehead, are mainly responsible for that spending. They have absorbed much of the budget.
The Government recognise that we have a responsibility for flood and coastal defence. We take it seriously in relation to the money that we have allocated. We are allocating an increasing amount of money for flood and coastal defence, and we take account of the needs of areas such as the Somerset levels.
We must balance the needs of the communities in the area that the hon. Gentleman represents with our international obligations to an important and fragile conservation area. We will play our part in supporting local communities and responding to the recommendations that have been made to us by the regional flood defence committee and the Environment Agency.
The hon. Gentleman made legitimate and important points. However, I stress that local people should come together and agree a long-term management plan based on river catchments. Once the plans have been agreed, the issues identified and the priorities decided, I shall be only too willing to examine the proposals and respond as positively as I can.

Question put and agreed to.

Adjourned accordingly at seven minutes to Twelve midnight.